Paul L. Caron

Friday, November 16, 2012

Alm & Soled: 60% of Taxpayers Cheat on Deductions for Business-Related Car Expenses

GasNew York Times op-ed:  Filling Up on Your Dime, by James Alm (Tulane) & Jay Soled (Rutgers):

The next time you fill up your tank, you should know that the person next to you might be paying much less than you for gasoline. By reporting their personal automobile use as a business expense, millions of drivers are essentially getting taxpayer subsidies for their gasoline.

The tax code treats expenses incurred in the “ordinary and necessary” course of doing business as tax-deductible, including costs like gasoline, tolls, parking and vehicle depreciation. Consider a salesman visiting a client or a lawyer driving from her office to court. Depending on factors like her tax filing status, whether she itemizes her deductions, and whether she is self-employed, her savings could be as much as 35% — or $1.20 for every $3.50 of gasoline.

The deduction can’t be taken for personal auto usage, like grocery trips, vacation travel and, importantly, commuting. But about 10 million drivers break these rules every year, according to the IRS. More than 60% of the 16 million taxpayers who claim business-related auto expenses each year do so inaccurately. Some errors benefit the government, as when taxpayers mistakenly classify business-related expenses as personal ones. But the net result is a loss of about $6 billion in annual tax revenue....

What can be done? Congress can start by simplifying the deductibility rules and exceptions that currently confront drivers. It should also require more detailed expense reporting by taxpayers who use their cars for work; institute stricter requirements for write-offs; cap total auto-related deductions; and stiffen penalties for violators. (Thanks to technology, keeping track of business-related auto travel is far easier now than it was in the 1980s.) Congress might even go further and limit deductible car expenses to employers who actually own the vehicles in question and use them almost exclusively for business. These measures might be unpalatable, especially to some small-business owners, but they deserve examination.

Beyond the revenue, there is the matter of fairness. Americans who are already struggling to cover their commuting costs shouldn’t have to pay even more at the pump to subsidize those motorists who are filling up on their dime.

(Hat Tip: Mike Talbert.

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What a joke....The IRS is not going to look closely at this deduction...their are bigger fish to catch...I agree they should have bigger penalties and should have stricter rules but it AINT going to happen.

Congress should up the budget of the IRS by 50% and require it to be used only on agents and THEN we might see some revenues. Cheating is rampant in Corporations and individuals..or should I say AGRESSIVE tax planning?????????

Posted by: Sid | Nov 16, 2012 2:43:47 PM

The IRS cheats on car expenses, considering that peak prices of gas get ignored in setting the standard mileage allowance.

Posted by: Woody | Nov 17, 2012 7:38:57 PM

Instead of targeting automobiles, the article's authors should look at the tax loopholes and subsidies given to the Big Education Cartel.
Eliminating ed tax credits, deductions, and interest write-offs would greatly reduce the Government Deficit and lower run away education inflation.

Posted by: Steve | Nov 19, 2012 2:00:18 PM