IRS Help

[BOB W]

I have a situation where a W-2 driver works for a company that distributes beer to Delis’, Bars’, and such. For years these drivers (100+) have used helpers, at their own expense, to manhandle these heavy loads. I’ve been deducting this as casual labor on Schedule A Misc.

IRS decided to audit one of the drivers. In their note back, they are saying that labor cannot be deducted on schedule A Misc.

Can anyone please tell me where it can be deducted for this type of commissioned employee ?

[solomon]

I don't

see how it can be deducted any place. The driver is not self employed so Sch C is out. As an employee, this expense was not required by the company so 2106 is out. I see it as not deductible.

[RONCHECH]

What Type Of Audit Is This?

It Would Seem To Me That Schedule A Would Be Appropriate, Or Even Better Would Be Form 2106 Which Of Course Flows Into The Schedule A. However 1099's Should Be Issued To The Helpers. Did The "helper" In This Situation File A Tax Return And Report The Income? If Yes An Affidavit From The Helper Stating That He Did Pay Taxes On The Helper Fees Would Help Our Taxapyer A Lot. If The Helper Did Not Report The Payments He Received, I Would Be Inclined To Side With The Irs Auditor. Tell Me Something, Please. Is The Irs Having Face To Face Audits, Or Was This A Mail In Questionaire Type Audit? That Wouldn't Change Anything, But I Was Just Wondering As Most Of The "audits" That I Have Been Encountering Have Been Mail-ins.

[erchess]

My two cents

Self employed people can deduct labor expenses. Self employed people get by with deducting almost anything that helps them in their business. Employees on the other hand, can deduct only specifically allowed things. I don't believe that employees can deduct the expenses of their own employees except in the case of handicapped individuals who hire employees to mitigate their handicaps. For example, a blind business person might hire someone to read to them and perhaps to drive them places, or a paralyzed person might hire someone to assist them with ummm necessary personal business.

[Gene V]

Sounds like these drivers could be statutory employees, if so, then they could deduct the helper’s wages on Schedule C. However they are paid, I don’t think the helpers are independent contractors, I think they would be classified as employees of the truck driver.

[veritas]

Why are the expenses being disallowed?

Code Sec 162 says it is deductible. Is it because they can't document the expenses?

[solomon]

If

box 13 on the W-2 is checked, then I agree with Gene.

[jainen]

I would not accept

>>they are saying that labor cannot be deducted on schedule A Misc<<

I would not accept the auditor's decision on this, but insist on seeing her case notes that explain the reasoning and authority.

Labor is certainly deductible on Schedule A when appropriate. For example, there is no question that labor costs such as legal and accounting advice, skills counseling, resume prep, and even driving are all deductible as job search expenses. None of those are the least bit "for the convenience of the employer."

Many companies make workers use their own resources--clothing, tools, books, cars, If the job genuinely requires temporary help that is not provided, I see no reason why it wouldn't be deductible as a legitimate work-related expense.

[BOB W]

Here is the letter I sent for the paper audit. (Austin TX)



Letter of explanation relating to paper audit.

Nature of employment

I’m employed as a Route Salesman. I am responsible for attracting and servicing accounts, at my expense, throughout my territory. I drive the company’s truck and load & unload heavy beer bottle cases with my hand trucks. Many times I need help with my deliveries. There is a pool of college students, as well as others, that show up at the loading docks looking to provide manual labor assistance.

Casual Labor

The nature of the Casual Labor expense comes from the loading docks where various self employed individuals show up to help the route salesman handle the heavy loads for that day. These individuals are usually different from day to day, so no individual that preformed a service for me was paid enough to issue a 1099, if they did I would issue a 1099 as required. None of these people exceeded the $599 threshold. I marked my log book noting the expense along with my other cash expenditures for the year.

I have been told that this casual labor (SubContractor) arrangement has been going on for decades and that Sect 530 Safe Harbor allows this expense to be considered as an independent contractor expense due to the long standing nature of the relationship in the industry.

Section 530 Safe Harbor says:
The safe harbor rule of Section 530 minimizes the uncertainty of taxpayers concerning the proper treatment of workers as employees or independent contractors for purposes of employment taxes. Under this rule, an individual will not be reclassified as a common-law employee for employment tax purposes provided the taxpayer meets the following requirements:
1.The taxpayer did not treat the worker as an employee for any period.

2.In the case of periods after December 31, 1978, all federal tax returns (including information returns) required to be filed by a taxpayer with respect to a worker are filed on a basis consistent with the worker not being an employee. For example, Form 1099 must be timely filed for each worker treated as an independent contractor.

3.The taxpayer (or a predecessor) did not treat any workers holding a substantially similar position as an employee for employment tax purposes after December 31, 1977.

4.The taxpayer has a reasonable basis for not treating the worker as an employee. Three methods are provided that establish a reasonable basis for not treating a worker as an employee. However, the Section 530 safe harbor does not apply to technical services performed after October 22, 1986, pursuant to an arrangement between the employer and another organization.

An employer is considered to have a reasonable basis for not treating the worker as an employee if the employer's treatment of the individual was based on any of the following:

1. judicial precedent, published rulings, technical advise to the employer, or a letter ruling to the employer;

2. past examination of the employer by the IRS in which there was no assessment attributable to the treatment for employment tax purposes of individual holding substantially similar to the position held by this individual; or

3. long-standing recognized practice of a significant segment of the industry in which the individual was engaged.

IRS instructions to field auditors indicate that an employer unable to show that its treatment of an individual was based on one of the safe harbors above nonetheless may be entitled to safe harbor relief if it can demonstrate, in some other manner, a reasonable basis for not treating the individual as an employee. Further, IRS states that the reasonable basis requirement is to be construed liberally in favor of the employers.

Other expenses

Most, if not all, operating expenses are paid on a daily basis. Most are paid “out of pocket”. My expense book records these expenses throughout the year. Also enclosed is my pay stub showing expenses deducted from my pay for which I am responsible.

This is my written testimony in regards to these expenses.

[George Boutwell]

Who decides?

Can someone be a statutory employee, only if the company that pays him says so?

If the box on the W-2 is checked, does that mean IRS can not disagree and must accept the determination?

If I am deducting actual vehicle expenses, am I allowed to deduct the cost of labor paid to my mechanic for changing the oil? The tires? The transmission?

[BOB W]

George...

........ I like your thinking.....

Added: I found this.............. I will continue research on George's thinking.

Statutory Employees
If workers are independent contractors under the common law rules, such workers may nevertheless be treated as employees by statute ( statutory employees ) for certain employment tax purposes if they fall within any one of the following four categories and meet the three conditions described under Social security and Medicare taxes , below.

A driver who distributes beverages (other than milk) or meat, vegetable, fruit, or bakery products; or who picks up and delivers laundry or dry cleaning, if the driver is your agent or is paid on commission.

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I'm inclined to amend his return and treat him as a statutory employee because he meets those requirements.
Getting past the employer's W-2 ( statutory employee box not checked) needs to be further looked into.

Any help will be appreciated...............

[solomon]

Pub 529

lists 25 unreimbursed employee expenses - people not included.

[BOB W]

Yep.....

........... that is what the IRS is saying too. That is why I'm pursuing Schedule C direction. I just need to understand how to overturn the employers W-2.

But it does say ordinary and necessary expenses???

[solomon]

Any chance

of getting the employer to issue a corrected W-2 with box 13 checked?

[jainen]

I am on your side

Bob, as I said I am on your side in this. But I must object that you submitted a VERY weak presentation.

First of all, there is absolutely no description of why this is an ordinary and necessary business expense. Focus on the issue. Instead of explaining the nature of the day labor and its relation to the deliveries, you simply say, "Many times I need help." How can the examiner write that up?

Your use of Section 530 is full of problems. This is not even a section of the Internal Revenue Code, so it would need a little better context (assuming it had anything to do with the issue, which it doesn't) I can't figure out what your argument is. Nobody is asking if the helpers are employees or not. Nobody suggests that the taxpayer is an independent contractor--he was paid on a W-2, claimed work expenses on Schedule A, and started his testimony with "I’m employed." The audit is about whether these are allowable business expenses.

Why are you quoting things about 1978? That just drives your letter beyond the extremely critical limit of a single page. Why are you getting into "judicial precedent, published rulings, technical advise to the employer, or a letter ruling to the employer," not a one of which you actually offer in your defense? What's this about "long-standing recognized practice of a significant segment of the industry"? Do you have even a shred of EVIDENCE about anything you claim?

Why do you point out the lack of 1099's, emphasizing how casual the client's records are (even suggesting some are yearly rather than contemporaneous)? Are you trying to get on the auditor's good side by reminding her how to do her own job, paraphrasing "IRS instructions to field auditors"? It's not even a field audit! What do "expenses deducted from my pay" contribute except confusion in this case which is about other expenses that may not be related to the pay at all?

I apologize for my frankness, but I'm not surprised the examiner rejected your statement. There was nothing there to support your position.