'Auto Allowance'

[Happy Camper]

TP's accountant was paying their car payment out of the company. Company agrees it was part of the hiring agreement. However, no accounting was given for business miles and was not reported on W-2 as income. This happened several years and this year. When I discovered, gave TP overview of how it should be reported. Accountant is no longer with business. TP does not want to report on W-2 or 1099, feels like it may stir hornet's nest. Is there any way TP can still get deduction for this? Or is the best course to report as nondeductible expense. TP is C Corp.
Discussion?

[Roland Slugg]

It sounds like you understand the rules, so you just need to explain those rules to the corp's owner. The adherence to IRS-mandated rules is not optional. They can't be ignored just because someone "feels" that following them "may stir hornet's nest."

When I read your post, it wasn't clear to me whose car payment was being paid by the corp ... the owner's or the former accountant's. In fact you actually wrote "their car payment" suggesting more than one beneficiary of this unreported income.

The way to report those payments for the current year, of course, is to include them as gross wages on the person's W-2, and for prior years would be to issue new W-2 forms. Perhaps the form is W-2c. I believe there is also a form 941c to correct prior quarters' wage and tax information.

The payments are considered to be compensation and are deductible as such.

[Rapid Robert]

If I understand correctly, reading between the lines, the owner/sharehdolder of a C corp was getting car "payments" (principal, interest... what about insurance? Registration?) paid by the C corp. Car was probably used part for business and part for personal.

Even without title to the car being in the name of the corporation, some would say (and some would disagree) that you could make a case for equitable ownership and treat the car as owned by the corp, with 100% of expenses deductible by the corp and the loan being considered a liability of the corp. The value of personal miles driven should be shown as a taxable fringe benefit on the W-2, the amount determined by the FMV of the benefit, not by the cost to the corp of providing it.

Another easier, much simpler approach is to keep the car out of the corp, and simply reimburse the employee for business mileage under an accountable plan.

In any case, if prior returns were found to have errors, you need to explain the consequences of not amending those returns, but it is not your job to make the taxpayer amend them. However you should not prepare and sign a return with the same errors.

[Happy Camper]

I am sorry I was not clear-it was the accountant's car payment.

I appreciate both of your insights. I completely agree that I will not sign a return with the same errors. (they are a new client) Which is why I think my only option if the owner does not want to add it to the W-2, it is a non-deductible expense to the company.

Just discovered there are several employee's getting 'auto allowance' through payroll that the item was set up as 'non-taxable' so it is not being reported as compensation. Gonna be a fun discussion!

[Roland Slugg]

I think my only option if the owner does not want to add it to the W-2, it is a non-deductible expense to the company.

I disagree. That is not your only option. In fact, it's not an option at all. If one of the car payments is for the shareholder's own personal car, then you could treat that as a dividend and not a deductible business expense. But for all the other employees those car payments are compensation. As such each person's payments are deductible by the company and taxable to the employees.

On more thing: When you discuss this with the shareholder, don't let him play dumb. He knows very well that this is and always has been a scam to try to "get around" the tax law. He just hoped nobody would ever catch on ... but now someone has. He might not admit it, but believe me ... he knows.

[Happy Camper]

How would your advice change (if it would at all) if I am not doing the tax returns (at this time) and am a paid consultant to assist with the QuickBooks? I am a licensed CPA.

[JON]

Unequal Distributions

I do not think you want dividends as the answer-if unequal distributions to stockholders that only gets you in more trouble. They need to come up with some kind of record of business use times the standard (at a minimum) plan would reduce advances, loan payments (any other expenses for the auto paid by the corporation), the remainder is advances to the operator to either be paid back or taken into income.

[Snaggletooth]

Shifty-Eyed Sam Across Town

How would your advice change (if it would at all) if I am not doing the tax returns (at this time) and am a paid consultant to assist with the QuickBooks? I am a licensed CPA.

That is a big problem in our industry. If you refuse this unethical treatment, there is always some guy across town who will do virtually ANYTHING to collect a fee.

I've lost a few in my career to "Shifty-Eyed Sam." But the majority stick with me, and the ones I lose are those with whom I would have continual problems.

The answer to your question is dependent on whether you get paid. IRS says if you collect money for tax advice, you are liable for that advice under the same ethics as had you signed the return.

[Roland Slugg]

IRS says if you collect money for tax advice, you are liable for that advice under the same ethics as had you signed the return.

Really? I didn't know that.

If Happy Camper is only hired on a consulting basis, to assist with the company's bookkeeping/accounting, then I see no immediate problem here. Even if he (she?) is correctly advising the client of mistakes regarding those auto allowances ... mistakes that affect the company's income tax returns as well as its payroll tax returns and W-2s ... there are still no ethical issues if the client fails to follow that advice. HC can not force the client to obey the tax laws, and as long as HE/SHE is not the one who's preparing incorrect returns or W-2s, there are no violations of any tax laws or ethics issues that I'm aware of.

Having said that, HC may wish to advise the company's owner of the errors with the auto allowances, summarizing everything in a written memo. That memo should describe the mistaken treatment of the auto allowances, list the various returns and documents that were submitted with incorrect information (1120, 941, W-2, possibly others), along with an estimate of the approximate amount of additional taxes, penalties and interest on everything if the improper reporting is discovered by the IRS or state tax authorities. As I wrote in a previous reply in this thread, it's very likely the owner is aware that the auto allowances have been reported incorrectly, although there is a possibility he's unaware. In any case having his attention drawn to the extent of the possible additional taxes, P&I could be a sobering realization.

[Snaggletooth]

I believe I am correct

Sluggo, I think I am right, unless the Camper's service is restricted to accounting (including even the attest function), and does not move into the area of tax advice.

I can't give code or regs, but I had a study at a seminar where a tax preparer was paid for tax advice and the taxpayer prepared his return himself. Preparer was paid, but did not sign the return in an attempt to avoid liability.

Didn't work. IRS came after the taxpayer and the preparer as well.

[DaveinTexas]

Mileage?

I would suggest the TP (owner of C Corp) look into what it would cost the company to, instead of paying the Auto Allowance plus (eventually) payroll taxes, to reimburse the employee's their mileage expense. Substantiation would, of course, be required, but it would be another "option" to get around the payroll debaucle. It won't solve the previous year's problems but if the owner doesn't want to do the right thing and amend, there isn't much you can do about that.

If reimbursing mileage would cost the company, on average, $8,000 per employee, this might be cheaper than paying an auto allowance, plus payroll taxes, plus workman's comp on the payroll, etc, etc.