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A 3PL Exec, a Fleet Owner, and a Media Queen walk into a bar…And What Happened Showed Humanity Around Taxes

3pl tax bar

When last we met, I had given a brief account of a speech that I was invited to give at a National Logistics event recently. I talked about the 3 ways to grow your business and how it’s possible to double your gross simply by adding a complementary product or service.

It is incredibly gratifying to deliver real, bottom-line value to a big group like that. As much of a rise as I get out of getting to visit with a big group, the REAL fun is sometimes in the very small – dare I say intimate –meetings, usually no more than 2 or 4 people, that take place afterwards. More often than not, in the bar. That’s where all the business deals get made, usually over a drink. (I wish I’d figured that out a long time ago)

The thing that’s fun about meeting folks in a bar is, they will normally be a lot more open and frank than in a conference room with 500 other people.

So after my earlier talks, and after a light dinner, I wandered into the bar, halfway hoping for an empty table since my throat was sore from speaking. The place was nearly full, mostly with awesome transportation and logistics folks.

I spotted an empty table over in the corner. Relieved, I headed in that direction.

But just a few feet before I reached my table, a pleasant female voice called my name. It came from behind, over my right shoulder.

As it turns out, it was one of the better known media professionals in the logistics and transportation industries. She introduced me to her guest, an equally well-known 300-unit fleet owner. He immediately asked what I wanted to drink. (Translation: “Do you mind if I ask you a couple of tax questions?”) It was actually quite a pleasant visit with both of them. They had questions about issues with the IRS and deductions that I had talked about earlier. My favorite topics.

We were chatting about the burden of over-regulation throughout the industry, when one of the top-shelf leaders in the entire industry appeared at the entrance to the bar area. He stood there at the entrance looking around, and I realized everybody was looking at him. Two or three folks went up and greeted him and invited him to their table, which he graciously refused.

Flashback: Do you remember those spaghetti westerns from years ago? Everybody’s in the saloon having a great time… the barkeep slides a giant mug of suds down the bar to a thirsty patron… (I always wondered how they did that – do they use Turtle Wax on the bar to make it so slippery, or what?!) … the person in the doorway with those little swinging half doors would be somebody like Clint Eastwood or John Wayne…

So he started heading in our general direction, and I suddenly found myself wondering who whose table he would land at.  He was stopping at just about every table and greeting folks.

So this industry giant is closer to our table now, and it dawns on me – duh – he’s coming over to see the media queen. That makes perfect sense – she’s here to interview him.

Figuring that to be the case, I turn and begin saying my farewells to Mr. Fleet Owner and Ms. Media Celeb.

When suddenly, I feel a hand on my right shoulder. It actually felt more like a bear paw. (I don’t even know why I say that, because – best as I can remember, I’ve never had a bear paw on my shoulder to know what it would feel like.)

By the time I turned to see that it was him, he was already introducing himself to all of us.

He was smiling as he began, “Dennis, I enjoyed that address you gave. People are scared to death of dealing with the IRS, and they need to know there’s somebody like you out there.”

Wow! Inside, I was doing cartwheels over getting that kind of compliment, especially from such an industry leader. I finally spoke, “Well thank you very much Mr. ——-, that’s very kind of you sir!” and I before I could finish, he was already saying, “Please, call me —————-.”

I was able to steal a quick glance around the room, and every person within 20 feet was watching him.

He turned to the other two after brief pleasantries, and asked in a hushed tone: “Do you guys mind if I borrow this young fella for a few minutes?”

Wha – huh? **GULP**. He turned back to me and asked, “What are you drinkin’, Dennis? (Whew, I could breathe again… I hope!) The waitress was already awaiting his order, so just like that, I had a fresh drink.

He said, “Let’s see if we can’t find some place a little more private than this.”

As we walked out of the bar, there may as well have been spotlights on us. Before speaking earlier, most of these folks had probably never seen me. Now I’m walking out with one of the best known Logistics names in the country.

We grab a seat at a secluded table in the huge lobby area, and he wastes no time: “Dennis, I’ve got some serious issues I need to discuss, but I’ve got to know that this goes nowhere. What do I need to do?

I responded, “Well, you have to retain me – how much pocket change do you have on you?” Just like that, he said “Forget the pocket change – I’m sure you’ll need more than this. And suddenly, there were several Benjamins right beside my glass, folded in half. I didn’t bother counting them before trying to casually take them.

For the next half hour, he detailed a situation involving a close friend of his – also in transportation.

Seems his friend’s company had been plagued with poor record keeping of both income and expenses for an extended period. And this is a well-known company with an 8-figure gross.

3pl tax networkingLong story short, this logistics wizard was worried in behalf of an industry colleague that could be facing some IRS severe difficulties, due to an extreme lack of records.

What I told him could apply just as much to a 6-figure company as a 9-figure one.

So basically, I’m going to give you the generic version of what I told the gentleman across the table from me.

So here’s what I told him:

On the lack of records

As you might imagine, the IRS wants you to maintain records for the deductions you are claiming on your tax returns, especially business deductions. Certainly a reasonable request.

And if you review virtually any IRS Publication or set of instructions, it will tell you exactly what is “required” in order to take any given deduction.

But let me ask you a question:

What if your expense records were destroyed in a fire?

Or destroyed or disposed of by a spouse or significant other? Or what if, for example, you had been one of several hundred or more owner-operators living in New Orleans, Louisiana during the last week of August, 2005 when Hurricane Katrina wiped out countless homes and businesses, including those of these professional drivers and other transportation and logistics professionals?

Fortunately, there is a little-known law that allows for the estimation of expenses or re-construction of records using the best method available, if the actual records are missing.

This special rule of law is known as the “Cohen Rule” aptly named after an audit case involving none other than famed entertainer and song-writer, George M. Cohen.

It seems that Mr. Cohen’s income tax returns were audited in the 1940’s for a year during which he had traveled with his show for more than 30 weeks during the year.

Unfortunately, Mr. Cohen had not maintained records to back up the expenses he claimed on his tax return. So the IRS examiner disallowed most of his business expenses out of hand.

Fortunately, the story doesn’t end there.

He appealed the IRS’ disallowance, and eventually the U.S. Tax Court found in his favor.

Thus, his estimated expenses were all allowed and the “Cohen Rule” has held up since then. We have cited it in numerous cases where original records are found to be lacking or even non-existent.

What does this mean for transportation and logistics professionals everywhere? It means that if you can reasonably estimate valid expenses for which you have no original records, it is acceptable for you to claim a deduction.

On the likelihood of an IRS audit

One of the questions we are asked most frequently is, “What if I get audited?”

For the past several years, the IRS has actually shifted its resources (i.e., audit personnel) to significantly larger companies. So for the past several years, the nationwide examination rate has been about 1.5 percent which translates to 3 returns out of every 200 that are filed.

Fast forward to this past December, 2014. The IRS announces that due to significant budget cuts, they will be forced to substantially reduce the number of examinations that they were previously conducting. Talk about a Christmas present!

All of this said, we evaluate every return that we prepare for audit “red flags”. We always want every client to take every deduction that they have incurred, but there is no point in asking for trouble.

But let’s say that you are audited, and you consider the auditor’s proposal unacceptable. What then?

On the likelihood of a successful appeal

The good news here is two-fold:

Taxpayers have the right to appeal any adverse audit finding as the result of an examination, and,

The Appeals Process results in an adjustment of at least 35 percent in roughly 53 percent of all audit cases appealed! This literally means you have better than a 50/50 chance of a sizeable adjustment in your favor.

An acquaintance in the Appeals Division recently confided,   “Dennis, we’re the best kept secret in the IRS.  And I believe they keep it secret on purpose.”

Our firm is frequently called upon by other CPAs and attorneys to represent their clients in examinations.  Virtually without exception, the more unreasonable the outcome of the audit, the more likely there will be a highly favorable result on appeal.

This account is definitely not about me, and it’s not even about the renowned industry mogul that cared enough about his close friend in the business to seek out my help.

What it’s about, is to let you know that the playing field at the IRS is a lot more level than you might have thought. You may have a minor tax or accounting issue, or you may have a 3-alarm fire. It’s been our privilege to assist in the favorable resolution of both.

But there’s a second and equally important point from this that transcends accounting or tax issues. It’s that someone cared enough about a fellow business owner to get involved and seek a helping hand. I’m ashamed to say that didn’t even occur to me until I was actually writing this.

Who do you know that could use an encouraging word or your caring inquiry? I know I’ve fallen way short on this account. I’m sure the executive that requested my help for his friend had a totally full plate already. But he cared enough to get involved. We should all be so fortunate to have someone like him in our lives.

Whose load can you lighten today, with just a phone call or text to ask how they are doing or see how you can help?