If you are an owner-operator and receive an IRS audit notice, do not ignore it.

The IRS may want to see much more than your tax return. It may ask for receipts, mileage and travel logs, bank statements, fuel expenses, repair bills, insurance records, and other documents supporting the income and deductions reported on your return.

And if you do not show up for the audit or respond to the IRS, the IRS does not necessarily wait for you.

One of our owner-operator clients learned that the hard way.

What Happens If an Owner-Operator Misses an IRS Audit?

“Greg” was an owner-operator who did not appear for his IRS audit appointment.

The IRS proceeded without him.

The result?

An assessment of approximately $300,000.

That number was frightening. But it was not the end of the story.

Greg had something extremely important on his side: excellent records.

Receipts were kept. Travel logs were maintained. He had documentation supporting the business expenses claimed on his tax returns.

Greg’s case did not turn around simply because we had a better argument.

It turned around because we had the evidence.

His receipts and detailed travel records allowed us to prove expenses that had effectively been disallowed when he failed to participate in the audit.

Once those records were organized and presented to the IRS, the picture changed dramatically.

Greg ultimately came through the audit essentially unscathed.

His case teaches two important lessons every owner-operator should remember:

Never ignore an IRS audit notice — and keep your records.

Why Are Owner-Operators Audited?

Owner-operators often have tax returns that look very different from those of W-2 employees.

You may have substantial gross income while also claiming significant business expenses. Depending on your operation, those expenses may include:

• Fuel
• Repairs and maintenance
• Tolls
• Insurance
• Truck payments or depreciation
• Tires and equipment
• Travel expenses
• Meals
• Permits and licenses
• Professional fees
• Cell phone and communication expenses

An IRS audit may focus on whether those expenses were legitimate business expenses and whether you have sufficient documentation to support them.

The issue is not simply whether you actually spent the money.

You need to be able to prove it.

Who Has to Prove the Expenses on Your Tax Return?

Generally, if you claim a business deduction, you need records supporting it.

That may include receipts, canceled checks, bills, statements, logs, or other documentation.

Certain expenses, including travel and vehicle expenses, can require even more detailed records.

This is why keeping good records throughout the year matters.

There is a big difference between telling an IRS auditor:

“I know I spent that money.”

and being able to show the auditor:

“Here is the record.”

Greg could show the records.

That made all the difference.

What Actually Happens During an IRS Audit?

An audit does not usually begin with the auditor simply deciding how much additional tax you owe.

The IRS will identify the items it wants to examine and request documents supporting those items.

During an owner-operator audit, the examiner may:

• Review the tax return
• Ask questions about how the business operates
• Request receipts and supporting documents
• Review mileage or travel logs
• Examine income records
• Review bank statements
• Ask about large or unusual deductions
• Compare records to the amounts reported on the return
• Propose adjustments if the examiner believes an item cannot be substantiated

Once the examiner finishes reviewing the information, the IRS may accept the return as filed or propose changes.

If changes are proposed, the taxpayer does not necessarily have to agree with them.

What Records Will the IRS Ask an Owner-Operator to Provide?

The exact documents depend on what the IRS is examining, but an owner-operator may be asked to produce:

• Bank statements
• Credit card statements
• Receipts
• Fuel records
• Mileage or travel logs
• Repair invoices
• Insurance records
• Truck purchase or financing documents
• Settlement statements
• Forms 1099
• Business licenses and permits
• Records supporting meals and travel
• Prior tax returns

The IRS may also compare different sources of information to determine whether all income was reported.

This is why simply handing an auditor a box or pile of receipts is not the best approach.

We want to know what the IRS is asking for, what issue it is examining, and what documents actually answer that question.

Will the IRS Look at My Bank Deposits?

It may.

An audit is not necessarily limited to examining whether you have receipts for expenses.

The IRS may also review records showing your sources of income and compare those records with the income reported on your tax return.

For an owner-operator, that can include reviewing bank deposits, settlement statements, Forms 1099, and other business records.

That is why we want to understand the deposits going through the business account before the auditor starts asking questions about them.

Not every deposit is necessarily taxable business income. Transfers between accounts, loans, refunds, or other transactions may need to be identified and documented.

But you do not want to be trying to reconstruct that information for the first time while sitting across from an IRS auditor.

Are Travel Logs and Receipts Really That Important?

Yes.

Greg’s case is a perfect example.

The initial assessment was approximately $300,000. But Greg had maintained detailed receipts and travel logs.

Those records allowed us to substantiate his legitimate business expenses instead of simply arguing that the IRS assessment was wrong.

Good bookkeeping may seem like a nuisance when you are driving, making deliveries, dealing with dispatchers, repairing equipment, and trying to run a business.

During an audit, those records can become one of your strongest defenses.

Should You Just Give the IRS Everything You Have?

Not necessarily.

An IRS audit should be handled carefully and methodically.

Before providing documents, we generally want to understand:

1. What years are being audited?
2. What issues is the auditor examining?
3. What documents did the IRS specifically request?
4. Do the records support the return?
5. Are there deposits that need to be explained?
6. Are there large or unusual deductions that may draw additional questions?
7. Are there other issues in the records that should be addressed before they are turned over?

More documents are not always better.

The goal is to respond completely to the IRS while understanding what is being produced and why.

What Should You Do Before the IRS Audit Appointment?

Before the audit, take some time to get organized.

For an owner-operator, that may include:

• Reconcile bank deposits to the income reported on the tax return
• Organize receipts by expense category
• Review mileage and travel logs
• Locate fuel and toll records
• Gather truck purchase and financing documents
• Locate depreciation records
• Review repair and maintenance expenses
• Identify transfers, loans, refunds, and other non-income deposits
• Review any large or unusual deductions
• Make sure the documents support the amounts claimed on the return

Do this before the auditor begins asking questions.

Walking into an audit with organized records is very different from trying to explain three-year-old transactions from memory.

Can the IRS Estimate Your Tax If You Don’t Cooperate?

Failing to participate in an audit does not make the audit disappear.

As Greg discovered, the IRS can make adjustments based on the information available to it.

That can produce a very large proposed tax bill.

Once that happens, you may be forced to fight an assessment that might have been avoided — or dramatically reduced — if the proper records had been presented earlier.

What If You Disagree With the IRS Auditor?

The auditor’s proposed changes are not necessarily the end of the process.

If you disagree with the examiner, you may have the right to challenge the proposed adjustments.

Depending on where the case is in the process, that can include requesting review through the IRS Independent Office of Appeals and, in appropriate cases, challenging the IRS determination in court.

The important thing is to pay attention to the notices and deadlines.

Do not put an IRS letter aside because you disagree with it.

Some IRS notices give you a limited amount of time to preserve your appeal or court rights.

Missing one of those deadlines can make the problem much harder to fix.

What Should an Owner-Operator Do After Receiving an IRS Audit Notice?

First, do not ignore it.

Second, do not immediately start sending documents to the IRS without understanding what is being examined.

Gather the notice, your tax returns, receipts, logs, bank records, settlement statements, and other supporting documents.

Then determine exactly what the IRS is questioning and what documentation exists to support the return.

The earlier the audit is handled properly, the more options you generally have.

What If You Already Missed the Audit?

Do not assume it is too late.

Greg had already missed his audit appointment and was facing an assessment of approximately $300,000.

Fortunately, he had excellent records.

We were able to use those records to substantiate his legitimate expenses and dramatically change the outcome.

A bad audit result does not always mean the IRS has the final word.

But deadlines matter.

The longer an IRS notice sits unanswered, the more difficult the situation can become.

Facing an IRS Audit in New Jersey?

At Tomes Law Firm, we help New Jersey taxpayers and business owners deal with IRS audits and tax problems so they can spend their time running their businesses instead of trying to figure out how to deal with the IRS.

If you are an owner-operator who received an IRS audit notice, or you already missed the audit and received a large proposed assessment, do not assume that the number on the IRS notice is necessarily the amount you ultimately have to pay. Contact Tomes Law Firm today at 732-333-0681 or 833-4IRS-TAX or visit us online at tomelaw.com to schedule a confidential free consultation.

We Solve Tax Problems. You Get Peace of Mind.