UBER Accounting

 

Uber Driver Takes a Wrong Tax Turn

Whether clients run a business formally or informally, the IRS requires they keep adequate records for income and expenses, otherwise a visit to the Tax Court may be in their future to sort things out!

In a new case, Nurumbi, 2021-79, TC Memo 2021-79. 6/30/21, an Uber driver ran afoul of the rules, but at least was able to salvage some deductions in Tax Court.

Participants in the so-called “gig economy” ranging from drivers to temporary landlords to delivery services people are generally treated as self-employed individuals. In this capacity, the income they receive is fully taxable, but they may be entitled to deduct qualified business expenses to offset part of the tax. In addition, the participant is liable for self-employment tax, but can write off half of the tax on their personal return.

Facts of the new case: The taxpayer, a resident of Arizona, used his Uber account and mobile application to provide transportation to passengers in exchange for fares.  But he wasn’t the only driver using the account during the tax year at issue.

Notably, the taxpayer recruited friends and family to sign up for Uber under his account. They rented his vehicles, which he had purchased using car title loans or at auctions.

The drivers could access the Uber app to see their trips driven and fares collected, but all fare proceeds (net of Uber’s fee) were paid directly to the taxpayer’s Uber account. There were no written contracts between the taxpayer and the other drivers.

Every week Uber paid the taxpayer for his own driving activity and for that of the drivers under his account. It would subtract its fee and deposit the remaining funds into a Bank of America (BoA) account. Then the taxpayer would withdraw funds from the BoA account, deposit some of the withdrawn funds into a Banco Bilbao Vizcaya Argentaria (BBVA) account and retain the remainder as cash.

The taxpayer paid the drivers their individual earnings, as shown on the Uber weekly statements, routinely withholding $250 as a vehicle rental charge and occasionally reimbursing the drivers for gas, vehicle maintenance and other miscellaneous expenses. Some of these payments were made by electronic transfer from the BBVA account and others were made in cash.

Key points: The taxpayer didn’t provide the drivers with any documentation indicating their payment and the drivers did not submit receipts for gas, vehicle maintenance or other miscellaneous expenses. Similarly, the drivers did not keep any logs of expenses incurred while driving under the taxpayer’s Uber account. Nor did the taxpayer keep a log or other document recording how much he paid the drivers, whether by BBVA transfer or in cash.

The taxpayer’s situation unraveled when Uber issued him a 1099-K that reported more than $542,000 in payments that he left off his return. The IRS adjusted his 1040 to include the unreported income and allowed a deduction for the bank transfers to the other drivers, but not for the cash payments.

End of the line: The lack of documentation proved to be fatal to the taxpayer’s case. The burden of proof is on the taxpayer to establish the full amount he claimed to have paid out, including the cash. Although the Tax Court found the taxpayer’s testimony to be credible, it upheld the adjustments made by the IRS.

There’s a moral to this story: Encourage clients to keep detailed records of their business transactions. The IRS and the courts aren’t likely to simply accept their word if income or deductions are ever challenged. This is especially true for participants in the gig economy who often play fast and loose with the rules.

Thanks to Ken Berry for this insightful information for Uber drivers