Written by: Chuck Long, EA
Often when assigned new cases, we find members who have made what initially appear to be insignificant errors and end up owing substantial amounts of tax. These errors are sometimes due to procrastination, misstatement, or incomplete understanding of the tax law, and the amounts owed can be staggering.
Our member was a truck driver who worked for a trucking company whose compensation payments were arranged by a third party. The drivers were issued debit cards which could be used to pay their “over the road expenses” (i.e. fuel, maintenance, scales, towing, etc.). The cards were refilled by the company with the drivers’ compensation and were used in lieu of a paycheck. Also subtracted from the debit card and the drivers’ gross compensation were the lease payments for the truck tractors. With this system the drivers do not have to carry cash and the record keeping for their income and expenses are all reported on one statement.
The system seemed like a great idea until the member decided to assign his tractor lease to another truck driver. Due to litigation the assignee was involved in, the member was unable transfer the vehicle into his name. The member agreed to allow the assignee to drive the truck without transferring the lease or getting the debit card for the vehicle switched to the new driver’s Social Security Number.
The member procrastinated, and even after the new driver’s legal problems were settled the lease was never assigned and the debit card never transferred. The result of this was that the member received a 1099-MISC showing $49,646 of additional income that had been paid to the new driver. The member did not issue a 1099-MISC to the new driver and received an IRS notice stating that he owed $17,775 of additional tax and interest, including a “Substantial Understatement” penalty. The member was surprised by the additional tax and didn’t recall receiving the additional 1099-MISC form.
The member contacted the new driver, who was forthright about the amount being his income. But a year and a half after the fact seemed to be too late for the member to report the income and issue a belated 1099-MISC. The member contacted the debit card company that had issued the 1099-MISC, and while they promised to research the matter they said it would be several weeks before they could trace the income and determine to whom the credits had been issued.
After discussing this case with my colleagues, we decided the best way to proceed would be to respond to the notice by explaining the circumstances. This would hopefully by time so the debit card company could complete its investigation. Meanwhile, sending a response to the IRS would make it less likely that they would close the case.
Due to the member’s occupation as a long haul trucker, it was difficult at times to keep him focused on getting the necessary documents together and staying in touch with the debit card company to make sure they completed their investigation. Fortunately, the member was tenacious enough that we were able to get the necessary documentation and respond to the notice.
While I never heard whether the debit card company ever finished its investigation, the point became moot when we received the notice from the IRS changing the amount owed from $17,775 to a refund due of $237. Our member was thrilled that our joint efforts had garnered such a favorable outcome.
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