FTB scrutinizes car and truck expense compliance
Finds 80 percent noncompliance rate
A recent audit self-compliance pilot project examining car and truck expenses claimed on Schedule C, Gross Profit or Loss from Business, revealed an unwelcome result: taxpayers incorrectly reported their car and truck expenses on more than 80 percent of returns selected.
In a 2006 article (see Closing the Small Business Tax Gap, 03/01/06 on Forbes.com), the IRS estimated that Americans underpaid their federal taxes by $345 billion in 2001. Special research audits the IRS conducted on 2001 returns indicated that individual taxpayers reported just 57 percent of their business income.
California Revenue and Taxation Code Section 17201conforms to IRC Section 162 allowing taxpayers to deduct all ordinary and necessary expenses paid during the taxable year in carrying on any trade or business. Ordinarily, expenses related to the business use of a car, van, pickup, or panel truck can be deducted as transportation expenses.
Your client can deduct transportation expenses:
- Incurred while driving from his home to a client's place of business while conducting business.
- Between one place of business and another place of business if they are business-related.
Your client can never deduct transportation expenses between his home and his business or regular place of work, as those are personal commuting expenses.
The Personal Income Tax program initiated the Car and Truck Expense Self-Compliance pilot project as one of the department’s efforts to reduce California’s tax gap, which is estimated at $6.5 billion. Based on earlier studies, there is a high rate of noncompliance related to car and truck expense deductions in tax returns. The pilot program’s intent is to encourage self-compliance by first educating taxpayers, and then giving them an opportunity to correct any filing errors, rather than undergo the more "traditional audit." In a traditional audit, an auditor requests specific substantiating documentation, performs the analysis, computes the revised tax, and issues a proposed assessment.
Our audit staff mailed self-compliance letters to taxpayers who claimed the car and truck expense. The self-compliance letters included Frequently Asked Questions (FAQs), the applicable law, and a simplified auto expense worksheet(s) for taxpayers to determine the allowable amount of their car and truck expense deductions. Taxpayers were asked to indicate on the worksheet their business and commuting mileage, and details of actual expenses incurred such as gas, insurance, parking, etc. The self-compliance letter listed the names and phone numbers of the Auditor, Audit Lead, and Audit Supervisor, to address any questions or concerns a taxpayer may have had about the self-compliance letter. Taxpayers that believe they paid additional tax in error in response to this self-compliance letter should follow the normal administrative remedy of filing a claim for refund.
The results of the Car and Truck Expense Self-Compliance pilot project revealed that the taxpayer incorrectly reported their car and truck expenses in more than 80 percent of the returns selected. Using the forms provided with the self-compliance letter, taxpayers were able to self-correct these returns and pay the correct amount of tax.
The use of self-compliance letters grew out of the Voluntary Compliance Initiative, which provided taxpayers an opportunity to self-comply to avoid undergoing compliance actions.
Because this approach encourages self-compliance by educating taxpayers, and lowers the cost of tax administration for all taxpayers, self-compliance letters are an audit tool that we will consider for future use. It allows us to continue to educate taxpayers, address the tax gap, and promote self-compliance - all of which are essential to good tax administration.
View example of Self-Compliance Lettter
Frequently asked questions
Why did Franchise Tax Board contact me?
We contacted you because you claimed an auto expense deduction. Earlier studies indicate a high rate of noncompliance in this area. We are requesting that you recheck and verify deductions for auto expenses claimed on Schedule C.
How do I determine the deductible amount of automobile expense?
You can determine your deductible amount by completing the enclosed Auto Expense Worksheet.
What if I need assistance completing the Auto Expense Worksheet?
For assistance, you may call the auditor on the cover letter or you may consult your tax advisor.
Can I use one Auto Expense Worksheet for multiple vehicles?
No. We have included one copy of the Auto Expense Worksheet for your convenience. If you listed expenses for more than one vehicle on your Schedule C, please photocopy the Auto Expense Worksheet provided, and fill out a separate worksheet for each vehicle.
What if my return is correct and does not require any changes?
If you believe your auto expenses are correct, you still need to complete the Auto Expense Worksheet and return it to us.
How will the Auto Expense Worksheet be used?
We will review your completed Auto Expense Worksheet. We may contact you to verify the amounts you entered on the worksheet. If necessary, we may request your tax records supporting the auto expense deduction. We will notify you of any difference.
What happens if I do not return the Auto Expense Worksheet?
We may disallow your auto expenses, and your return remains subject to audit.
Where do I send my completed Auto Expense Worksheet?
Please send your response to the following address:
FRANCHISE TAX BOARD
ATTN: AUDITOR'S NAME
CITY, CA ZIP CODE
We enclosed a self-addressed envelope for your convenience.
According to Internal Revenue Code Section 163(h), taxpayers must separate expenses that are both business and personal. You can only deduct the part that is a business expense.
Internal Revenue Code Section 162 defines deductible business expenses.
California Revenue and Taxation Code Section 17201 conforms to Internal Revenue Code Section 162.
You can use one of the two following methods to figure your deductible expenses:
- Standard mileage rate.
- Actual automobile expenses.
If you qualify to use both methods, you may want to figure your deduction using both methods to see which gives you a larger deduction.
Standard mileage rate
Compute your allowable business mileage by completing the attached worksheet. The standard mileage rate for business miles is:
2002 - $0.365
2003 - $0.360
2004 - $0.375
If you want to use the standard mileage rate for a car you lease, you must use it for the entire lease period.
Actual auto expenses
If you do not use the standard mileage rate, you may be able to deduct your actual car expenses. Actual auto expenses include: depreciation, gas, insurance, lease payments, licenses, parking fees and tolls, registration fees, and repairs and maintenance.
Jane reported an Auto Expense Deduction of $7,000 on her 2003 Schedule C. Jane drove a total of 20,000 miles in 2003. The total commuter mileage between Jane's home and her principal job site was 8,000. The total mileage driven for personal and pleasure purposes was 3,000. Jane leased her vehicle. Jane has a written mileage log substantiating 7,000 business miles for the year.
Computation of standard mileage rate:
|1.||Total annual miles driven.||
|2.||Less: total miles commuted between home and business/workplace.||
|3.||Less: total miles attributed to personal purposes (shopping, vacation, etc.).||
|4.||Total miles driven for business purposes.
(Line 1 <minus> Line 2 <minus> Line 3 = Line 4)
|5.||Enter the amount of mileage that you have written support for
(Line 5 cannot exceed line 4). (Please ensure that you have mileage log, travel calendar and other documents to support this.)
|6.||Multiply line 5 by $.360. This is your total standard mileage deduction.||
Computation of actual auto expenses: (Please ensure that you have the vendor's invoices, receipts and other documents to support these expenses.)
Total actual auto expenses:
b. Lease payments
c. Registration fees
d. Licenses fees
e. Cost of repairs and maintenance
g. Insurance payments
h. Total of all expenses
(This is your total actual expense)
|8||Divide Line 5 by Line 1
(The result will be a decimal number 1.0 or less)
|9||Multiply Line 8 by line 7i.
(This is your total allowable deduction using the actual auto expense computation)
( $ 12,000 X 0.35)
|10||Business Parking Fees and Tolls||
|11||Add Lines 9 and 10
(This is your total allowable deduction using the actual auto expense computation).
|12||Your allowable auto expense deduction is the larger of Line 6 or Line 11.||
We will adjust Jane’s 2003 Schedule C expenses by $2,300, the difference between the amount she reported and her allowable deduction ($7,000 - $4,700 = $2,300).