You’ll probably face a fuel-tax audit someday, so don’t just wait for the taxman to knock – be proactive and prepared for his visit.
Death and taxes may be life’s only certainties, but a tax audit isn’t far behind. “We never talk about ‘if’ an audit’s going to happen,” says Bill Ashburn, vice president of Prophesy Transportation Solutions. “It’s ‘when.’ It doesn’t mean you’ve done something wrong. You’re just going to be randomly selected sooner or later.”
Fauber Freightways, a 21-truck fleet in Staunton, Va., recently got “randomly selected” for audit by the Virginia Department of Revenue, a first in the eight years Missy Back has been Fauber’s office manager. She knew exactly what to expect, though. For 13 years, she was in banking, another much-audited business.
“Your stomach hurts when you say the word ‘audit,’ ” Back says. “But we just set the guy upstairs with all the records and left it to him.”
Trucking veterans inevitably become audit veterans, too. In the eight years Dave Stock handled fuel management for Direct Transit of North Sioux City, S.D., the 1,400-truck fleet went through “15 or 18 audits.” Stock – now president of Fuel Systems Services and vice president of fuel management administration for ProMiles Software Development – got to know a parade of auditors.
“You meet all kinds of people,” says Stock, who recalls the audits as a learning experience. “We found out things we were not aware of, things that helped the business run better.” Learning that New York counted toll miles differently from regular miles, for example, cost the fleet $50,000 – but only once. “You didn’t make the same mistake twice.”
All this has made Stock philosophical about audits, whether internal or external. “You have to audit,” he says, “because when you audit, you always catch something.”
Fauber is based in the Shenandoah Valley, but its auditor was dispatched from the Tidewater area. He brought his own laptop, armed with his own calculation software, and did some of his work at night after office hours, Back says. By mid-February, the auditor had worked a total of about 40 hours on Fauber’s books – six hours one day, five another, and so forth – and was about two-thirds of the way through when “He got pulled off of ours to go do something else,” Back says. Auditors, like other civil servants, are stretched thin.
So far, however, Back sees no reason for complaint. “Out of 3 million audited miles, there was only a 6-mile difference,” she says – a testament not only to the accuracy of the Prophesy software that Fauber uses, but also to the small fleet’s concern with daily bookkeeping. “We know each individual driver, and we go over our dispatch every evening.”
An audit shouldn’t blindside you because you’ll get at least a month’s notice, Stock says. “They don’t give you just a week and say, ‘I’m coming in.’ ”
The state of Wisconsin, for example, gives fleets 30 days written notice, which includes “the date that the audit is to be conducted and the time period the audit will cover,” according to the state Department of Revenue’s International Fuel Tax Agreement (IFTA) Instruction Manual. “The audit emphasis will be placed on the distance accounting system to assure that all miles are reported and fuel receipts maintained to verify tax-paid fuel purchases.”
The auditor may request the records for 10 trucks over three years, specifying the first and third quarters of the first year, the second quarter of the second year, etc.
“It depends on however much work the auditors want to do,” Stock says. “They may let you choose which trucks, or they may ask for a master list of your trucks and make their own selection. For each truck, they’ll look at trip sheets, logs, fuelings. Of course, you should have the majority of these things on hand. They look at end miles, and if you’re more than 10 percent off, that’s a red flag.”
Fauber’s auditor pulled 15 months of records for certain drivers on certain trips and ran the numbers to see how they compared to the tax filings, Back says. “We got out our trip sheets and all our old reports. They recreate the trips, basically.”
You want the auditor’s request to be as specific as possible, “so you can have it all ready for them coming in,” and some states are really good about targeting information with laser precision, Stock says.
“On the other hand, if they want, they could audit your whole truck line,” Stock says – every truck, every run, every day for the whole time period under scrutiny. Barring evidence of criminal wrongdoing, that’s highly unlikely. “Usually, they’ll do 10 percent.”
The mantra for dealing with auditors, Stock says, should be “communication, cooperation and consideration. You don’t do cartwheels, exactly, but you’re as helpful as you can be. Be very cooperative with them. Set them up in a decent place. Make sure all the files they need are provided. If they have everything in front of them, that’s fewer questions they have to ask, and they get in and out more quickly. You want to make it as quick as possible. Have a fuel clerk or fuel-tax person on hand to help them if some clarifications are needed.”
Try to see things from the auditor’s perspective, Stock advises. “If you’re stingy with your information, they’ll think you’re hiding something, and I would think that, too.”
For many trucking companies, audits are not as scary as they once were, thanks to advanced fuel-tax and accounting software. “Our software has never failed an audit,” says Ashburn of Prophesy’s TaxTally fuel-tax reporting software, used by “at least half” of Prophesy’s 12,000 customers. In fact, he says, several states audit fleets using TaxTally.
PC*Miler’s Fuel Tax 11 “provides a nice, clean, organized accounting system” that both auditors and fleets find easy to read and understand, says Craig Fiander, senior director of marketing for ALK Technologies, maker of the software. “It makes life easier for both sides. Customers report that it has really helped them in an audit.”
“It’s all about streamlining the reporting process and providing peace of mind,” Ashburn says. He points out, however, that the fuel-tax software you’re using must be current. “As the laws change and the procedures change, the software changes.”
By buying or subscribing to regular updates, you’re basically paying the software company to keep up with all the state-by-state tax and form changes that a fleet employee otherwise would have to keep up with, Ashburn says. “Think of what it would cost a single fleet just to keep up with the changes.”
Actual state forms are included in the current versions of such software packages as TaxTally from Prophesy and Fuel Tax 11 from PC*Miler. “The data fills in, and you actually print out the actual state form, ready to sign and mail in,” Ashburn says. “With a check, of course.”
Some large fleets generate their own forms that contain all the IFTA-required information, but states are beginning to demand state-issued forms that include fleet-specific bar codes, Fiander says.
Increasingly, fleets are using fuel-tax software in conjunction with compatible dispatch and mileage software. TaxTally, for example, is sold separately but works best as “part of a total solution,” Ashburn says – so that when a trip from Hartford, Conn., to Birmingham, Ala., is entered into Prophesy’s dispatch software, the numbers flow into the fuel-tax software as well.
Fauber started out using only Prophesy’s Tax Tally, but now it uses Prophesy’s accounting, dispatching and mileage tools as well. “It makes things much easier,” Back says. “We basically put the information in one time, and it double-checks itself.” If what is normally a 500-mile run is entered as 600 miles, the software flags the discrepancy.
Thanks to technology, accounting techniques are gaining a sophistication undreamt of 30 years ago. TaxTally’s fuel-tax software, for example, now can download information directly from fuel card providers, so those are in automatic agreement with no typos and no missed receipts. “The newest thing” in the industry, Ashburn says, is compatibility with onboard recorders and satellite tracking, so that the data gets recorded in the ledger pretty much instantaneously.
“In the ideal system, everything is automated,” Ashburn says. “There’s so much opportunity for error when you’re keying things in by hand. You give yourself a head start by automating, and you’re a lot less likely to get behind. It’s one less thing to worry about, and a fleet has enough to worry about as it is. When it’s audit time, print out your reports, and you’re good to go.”
No software and no satellite, however, will do your thinking for you. “You get caught sometimes even though you use your Qualcomms and your satellite tracking and your Rand McNally,” Stock says.
States accept computer-generated mileage statements, but fleets are required to do their own frequent cross-referencing against logbooks, trip sheets, etc.
“Use of computer mileage calculators does not eliminate the need to maintain evidence or proof of truck routing,” says Stephen Harrod of Applied Arts Ltd., maker of Fuel Tax Buddy software. “Use of calculated mileages for tax purposes without any documentation that those routes were actually followed is still evidence of noncompliance in many states.”
Different operations will have different systems, but “You have to have a good system in place,” Back says. “You have to keep your receipts and write your mileage down. Try to be well-organized and have your fuel tickets in order.”
On the same page
Fiander says good tax habits are important not just in paying taxes but also in running a business. “You need to properly account for all your vehicles and drivers and activities.”
Ideally, an audit is not just something that a state forces upon you periodically, but something you continuously do yourself. “You’ve got to audit your TripPaks as they come in, for example, to see where your guys went and how they went,” Stock says. “It’s a good use of 10 minutes of your time each day. If you don’t self-audit, you’re going to owe a lot of money.”
The relationship between fleets that pay taxes and states that collect taxes need not be antagonistic, Fiander says. On the contrary, a fleet can receive great tax advice – well before an audit – from the motor carrier offices in the states most frequently run.
IFTA and state auditors are “very aggressive and proactive in going out and trying to educate the fleets,” Fiander says. Their goal is to have “everyone on the same page,” he says, because that makes life easier for everybody.
The information you need to stay compliant is abundantly available, tax experts say. “Your best preparation for an audit is just keeping up with your fuel taxes, not getting behind and incurring late penalties,” Ashburn says. “What auditors want to see is that you have records of everything and that those records are in agreement.”
Of all the audits he’s experienced, Stock says the most memorable may be the time “the auditor came in and said we didn’t owe anything.”
“I don’t know if you believe in miracles,” Stock adds, “but I do.”
Paying the price
Audit penalties can be serious business. For example: In calculating the tax due, in absence of other evidence, the state of Wisconsin assumes that each of a fleet’s trucks gets only 4 mpg.
“Audits can produce astronomical tax liabilities,” says Craig Fiander, senior director of marketing for ALK Technologies, maker of PC*Miler/FuelTax 11 software. “Some fleets come out with assessments of $50,000 or $100,000. That’s the wrong way to find out how to do your fuel taxes.”
In rare instances, penalties may be worse than a big tax bill. Florida’s Bureau of Motor Carrier Services notes, for example: “Failure to keep the required records and accurately report your mileage and tax-paid fuel purchases may result in the cancellation or suspension of your registration issued under the IRP (International Registration Plan) and IFTA.”
The same good recordkeeping and self-auditing practices that help you get through an audit also help you appeal an audit assessment if you think it’s inaccurate or unfair. In Wisconsin, for example, while payment is due within 30 days of assessment, a fleet also has 30 days in which to make a written request for an appeals hearing.
“It’s never set in stone,” says Dave Stock, president of Fuel Systems Services and vice president of fuel management administration for ProMiles Software Development. “One Virginia auditor said we owed $16,000, but it was really $7,000. I went in and had to re-audit the audit myself.”
Just as a pollster assumes his sampling of opinion is representative of the larger population, so an auditor assumes his sampling of trucks or runs is representative of the entire operation. One appeals strategy is to demonstrate that the sampled noncompliant trucks are anomalies, and that the fleet as a whole is in much better shape.
If that hearing in turn doesn’t go in your favor, Wisconsin invites you to request an independent audit from another jurisdiction – at your own expense. “The licensee will be responsible for all costs related to the audit,” the state warns.