Getting audited by the IRS is probably everyone’s least favorite thing (whether you’ve gone through it or not). That is no exception for rideshare drivers. Paying taxes in the first place for us can get a little complicated just because of how we earn our money compared to “regular jobs”.
But what happens if you do get audited by the IRS? Below, senior RSG contributor Paula Gibbins shares what to look out for and how to handle an IRS audit as an Uber or Lyft driver (or any kind of gig worker!).
Have questions about your taxes this year? Check out our ultimate guide to rideshare taxes!
Note: This article is for informational purposes only. We are not tax professionals, and the following information is based on our research and knowledge. However, every tax situation is different, and if you have individual questions about your specific situation, please reach out to a tax professional.
What is Your Likelihood of Getting Audited as an Uber or Lyft Driver?
According to Greg Iacurci’s article on CNBC, “The IRS audited roughly 1 out of every 220 individual taxpayers last year.” However, according to the article, “wealthy Americans are much more likely to be audited than low- and middle-income taxpayers.”
If you’re not a wealthy Uber or Lyft driver, it doesn’t quite mean you’re out of the woods. There is still a chance you could be audited!
One thing you can do to help lower the likelihood of getting audited is making sure you’re not throwing up certain red flags when you go to file your taxes.
Avoiding an IRS Audit as an Uber or Lyft Driver
Be Careful When Filing Your Taxes
As independent contractors, most drivers will file a Schedule C with info from their 1099s because they made enough to get one from Uber or Lyft. The average threshold for receiving a 1099 is typically $20,000 earned.
According to Stride, “for individuals filing with a Schedule C — the necessary form you must use if you have 1099 income — your odds of getting audited jump to 2.4% if you earn from $25,000 – $100,000.”
What some people don’t seem to realize is that even if you don’t receive a 1099, you’ll still need to pay taxes on that income. Don’t skip out on it just because you didn’t earn enough for Uber and Lyft to send you the paperwork.
Even if you don’t get a 1099, both Uber and Lyft will provide you with year-end tax statements that will show how much you earned on each platform, the fees Uber and Lyft have taken out.
Despite having the total number of miles you’ve driven stated on these forms, you still need documentation in case you get audited.
Can’t get all of your earnings from Uber, Lyft or another gig company? Check your bank statements! Depending on how you have your earnings deposited, you should be able to chart your pay through your bank account (use the search feature to go back throughout the whole year of 2020, if you worked for a gig company beginning in January 2020).
Gather All of Your Documents
It’s a good idea to use an app like Stride or TripLog to monitor and record your on-app driving. If you need help choosing which app is best for you, check out our Mileage Tracker Review article. One driver from Oregon who wrote to us about being audited stated:
“I have supplied them with all my Uber/Lyft documentation and daily driving logs which include begin and ending odometer readings for each day. They are now asking for a narrative of all my miles between drop-off and the next pick up to include where I went, why I picked where I did if sitting in a parking lot, and the amount of time between the requests.”
That is a lot more detailed than anyone would have imagined the IRS would ask for. Who writes down why they decided to park in a mall parking lot to wait for their next ping or records how much time there was between dropping of someone and getting your next ping?
According to the IRS, when you receive a notification of being audited, “We’re asking for information to verify items you claimed on your tax return. You must send in the documents needed to close your audit or we will send you an audit report showing our proposed changes.”
After you send in the documents asked for by the IRS, “If you sent us copies of documents that proved you were eligible for items you claimed on your tax return, we will send you a notice to let you know your audit is closed. If we held your refund, you should get your refund in eight weeks if you don’t owe other taxes or debts we’re required to collect.”
The IRS website also features a section called, “Your Rights During an Audit”:
Your audit packet includes:
- Publication 3498-A, The Examination Process (Audits by Mail) PDF. This publication covers what happens during an audit, your rights during the audit, and your rights to appeal the results of the audit. It also lists more resources to help you.
- Publication 4134, Low Income Taxpayer Clinic List PDF. Low-income taxpayer clinics (LITCs) aren’t part of the IRS, but an LITC may help you with an audit, an appeal, or collection issue for free or for a small fee.
- Publication 1, Your Rights as a Taxpayer. This publication informs you of your rights and includes information on the audit process as well as the collection process.
If you’re being audited, be sure to read these to make sure you understand your rights and what steps you can take to appeal if you feel the need to. It even includes a way for you to get help with your audit if you need it.
It’s likely that the driver who reached out to us got a notification stating there was something wrong with his Schedule C or something the IRS wanted to take a closer look at with documentation to back up the claim.
The IRS states, “When your tax return is selected for audit, you must send copies of your records that show the gross receipts and business expenses claimed on your Schedule C.
- Gross receipts are the income from your business. Proof of your gross receipts includes cash register tapes, bank statements, bank deposit slips, receipt books, sales invoices, credit card charge slips, and Forms 1099-MISC.
- Business expenses are the costs paid to carry on your business and proof of your expenses includes canceled checks or checking account statements which clearly show the expenses paid, cash register tapes, account statements, credit card sales slips, and invoices.”
To see what the IRS expects of you for record-keeping as a business owner (which is what independent contractors are considered), check out this section on their website called Publication 583 (01/2015), Starting a Business and Keeping Records.
If you’re claiming your new dash cam as a business expense, you’ll want to hold onto the receipt for it in case the IRS comes asking about it. Anything else you mark as a business expense would need the same documentation. If you claim something on your taxes, you need to be able to back it up with evidence.
If you use a service like TurboTax, it shows you before you submit your taxes if you have a high chance of being audited.
If you do have a higher risk, you might want to go through it then and fix whatever the issue may be to try to avoid being audited, which is a much more complicated process than fixing a portion of your taxes upfront.
If you don’t feel comfortable doing your own taxes, then have a professional prepare them for you. This is the more expensive route to take, more often than not, but you’ll have them able to help you out if you run into issues from the IRS. A professional tax preparer may also help you find deductions you wouldn’t find on your own.
I have a professional tax preparer since my husband and I have our own business, do rideshare, do freelance writing and a W-2 job. It’s just easier than trying to sort through it all ourselves.
It actually saved our skin a bit. The first time we filed as a business, we accidentally put a number in the wrong box. If the IRS had caught it and audited it, it could have been a much bigger hassle. Instead, our tax guy caught it and said, “Let’s take care of this now.”
We ended up owing, but we’re glad to have taken care of it at that point instead of raising a red flag to the IRS.
Avoiding Red Flags
1. Reporting income that doesn’t match your tax documents
If you report more income or less income than what Uber and Lyft submit, that will throw a red flag up for the IRS. Even if you just have your tax statements and not the 1099s, you’ll want to report the correct income from those.
2. Deducting personal or business mileage that you can’t prove
You need to be able to prove every penny that you’re claiming. You won’t have to submit that information upfront, but you’d better be able to provide evidence when and if the IRS asks. Keep in mind, you can’t take the standard deduction and deduct expenses as well. Choose one or the other.
The standard deduction includes wear and tear on your vehicle. If you claim the standard deduction, you can’t also submit for having to replace your tires or the cost of your oil changes.
3. Deducting meals that aren’t for business
In order to deduct meals, you need to be with a client or customer or someone related to your business and talk business with them. Your sandwich from the while you’re out doing Uber or Lyft does not account as a business meal. Don’t make the mistake of claiming things as business expenses if they are not.
Have you ever been audited by the IRS? If so, what was the outcome?
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-Paula @ RSG