Question

While visiting a client to deliver their 2019 tax documents, one of the owners approaches you and states: "The IRS says my travel is no longer business travel, but instead, is commuting. They are saying I am going to owe taxes on the money the company has reimbursed for my travel. I spend $1,500 per week traveling, and travel at least 50 weeks out of the year, traveling between Houston, Los Angeles, Seattle, Chicago and Philadelphia. I have been traveling like this for the past 10 years. That is a lot of money we are talking about. The IRS also said something about fraud, fines and penalties, maybe even jail time. Are they right? Can they send me to jail for doing my job? What should I do?"  

What will you tell your client? What laws govern this situation?

Is there a time element that affects this topic?

Answer 1

IRS provides for deduction of your business travel expenses that are ordinary and necessary for your business, profession or job

Here travel expenses deductible include away from home travel for a period substantially longer that your ordinary day’s work for business, profession or job and you need to sleep or rest to meet the demands of your work while away from home

Home means general area of your tax home where the main place of business or work is located regardless of your family home. Also if your work demands regular travel and work at different places the tax home is the main place of your business

This means travelling away from home overnight

Example

A rail road contractor returning to tax home after 16 hours and have 6 hours rest for two meals and sleep at hotel before starting round trip is a business travel

Whereas a truck driver getting only an hour’s rest before turn around isn’t an adequate rest period and hence not a business travel

Travel expenses that are extravagant, lavish or personal in nature are non-deductible

Example if you live in Seattle and your business is in Chicago, you don’t have place to reside in Chicago. Also you visit your family every weekend so even if you expend for food, hotel and your travel to Chicago from seattle as Chicago is your tax home. As the travel on weekends isn’t for your business but for personal use

Length of time spent at a business place is the main factor determining tax home

Travel expenses to and fro different cities from main place of business i.e. tax home in connection with temporary assignments are deductible

Travel expenses in connection with indefinite work assignment (in excess of 1 year) are non-deductible

Travel expenses for convention beneficial to business or trade are deductible

Travel expenses can be claimed and deducted in form C

Commuting

Transportation between your home and your main or regular place of work

It includes:

Getting from one work place to another within the city

Visiting clients

Going to business meeting away from workplace

Getting from home to temporary work place

Transportation does not include expenses incurred while travelling overnight

Daily transportation expenses incurred while travelling from home to one or more regular places of business are generally non-deductible commuting expenses

But the exceptions to these are

If you have one or more regular places of work outside your metropolitan area and your residence is your tax home i.e. main place of business

Transportation between residence and main place to work are non-deductible as they are personal commuting expenses

IRS Audit timelines

IRS can audit for 3 year typically, it can go upto 6 years for large understatement of income i.e. substantial understatement of income i.e. if income is omitted by more than 25%.

If IRS feels that the omission was fraudulent then it gets unlimited years to audit

So it is important to prove that such omission wasn’t fraudulent or intentional

IRS Penalties and fines on fraud

If anyone commits a tax evasion or tax fraud the IRS can prosecute and send to jail. Most tax crimes carry maximum 5 year imprisonment and a fine of $ 100000

The penalty can result upto 75% of the tax due plus interest

In civil tax fraud penalty IRS must only prove fraud by clear and convincing evidence i.e. the level of proof showing that the fact is highly or reasonably certain. It does not require absolute certainity

But tax fraud requires voluntary and intentional violation of legal duty. IRS must show that you knew that the expenses claimed as travel were actually commute.

The rule ignorance of law is no excuse does not apply to tax law

Ignorance of law can be a complete defence to the conviction of tax fraud

As a client

You may either provide reasonable proofs for IRS to consider that itw as actually a travel and not commute

If you fail to do so you may prove that such was a mistake and not a fraud, it was unintentional and was ignorance of law