Tax Returns Are Not Always What They Seem

When I was first assigned this case, I could easily see the reason it had been selected for audit by the IRS. The Member had reported wages of $80,376 from a job as a commercial diver and a deduction against that income of $47,501 for unreimbursed employee business expenses. The expenses represented 59% of his wages, making his tax return seem like an easy target. But as the IRS would soon learn, the audit was not the sure win it appeared to be.

As the Member explained, $35,820 of the deduction was a qualified section 179 deduction for a new truck used 100% for business. The new Ford F150 had been purchased during the year to replace an old 2002 Ford F150 which the Member had sold during the tax year, reporting a taxable gain of $928.

The response we sent to the IRS service center included a letter from the Member’s local union verifying that he was responsible for his own work tools, uniform, equipment, transportation and traveling expenses, and that none of the items qualified him for reimbursement. As part of the response we also provided a contemporaneous handwritten mileage and traveling log, receipts for actual business trips expenses, receipts for tools, equipment, education, union dues and actual vehicle expenses, including the bill of sale for the Ford F150, substantiating the section 179 deduction of $35, 820. In addition, although the Member had not claimed a home office, we provided several pictures showing the heavy equipment he stored in his garage, justifying the absence of commuting mileage.

The IRS replied, allowing all of the employee business expense, but limiting the section 179 to $11,060 based on Internal Revenue Code section 280F. This was creating additional taxes of $6,877, an Accuracy Related Penalty of $1,375 and interest of $431.53, for a grand total amount due of $8,683.53.

I immediately contacted the Member to inquire about the characteristics of the Ford F150. He confirmed that its weight was more than 6,000 lbs and the cargo area more than 6 feet long. I requested that he send me a picture of the vehicle’s Safety Compliance Certification Label, which should be attached to the driver’s side door. The Member sent the picture and confirmed that the cargo area was 6.5 feet long, just barely over the section 280F limit length of 6 feet.

My next response to the IRS included a picture of the vehicle’s Safety Compliance Certification Label showing that the gross vehicle weight rate (GVWR) was 7,150 lbs and that the cargo area was longer than six feet. In my letter I asked the IRS examiner to reconsider his previous determination and reinstate the full section 179 deduction since the section 280F limitation did not apply to the vehicle in question.

A few weeks later we received a letter from the examiner stating that no change would be made to the tax return. The Member was thrilled to be free of this debt.