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Note: Readers are cautioned that the following document was found on the InterNet, its source, date, currency and authenticity are uncertain, but believed to have originated out of the Los Angeles IRS Region Office in 1989. (note: I found this document also posted on the IRS site - aj) (Links)

IRS Audit Technique Guides

Tax Professionals use IRS Audit Technique Guides to assist them in preparing for federal income tax returns as well as IRS examinations. These Market Segment Specialization Program (MSSP) guides represent the game plan on how the IRS conducts an audit and they are useful to both tax preparers as well as small business owners. These guides are available from AIM's Tax Pro Resource Center.

Audit Technique Guides (MSSPs) are the vehicles used by the IRS to train its examiners. MSSP calls for increasing the level of expertise of examiners by setting up teams to conduct an in-depth, internal study of a particular market segment, (tax issue, industry issue or profession) and using that knowledge to develop guidelines specific to the business environment. This will ultimately allow the IRS to work with the representatives of the market segments to make compliance with the tax laws easier to understand and easier to do.

Taxicabs: IRS Audit Guide

AIMís Tax Center secured this information from the Internal Revenue Service through the Freedom of Information Act. Portions of this Taxicab Audit Guide are reproduced below. We make no warranty on the correctness of the information contained herein. The complete text of this Audit Guide is available from AIMís Tax Center.

MARKET SEGMENT SPECIALIZATION PROGRAM

TAXICABS

This material was designed specifically for training purposes only. Under no circumstances should the contents be used or cited as authority for setting or sustaining a technical position. -IRS

Department of the Treasury Training 3149-108 (5-93)

Internal Revenue Service TPDS 84459N

TABLE OF CONTENTS

Introduction

General Information

Examination Techniques

Pre-Examination Analysis

Books and Records

Reconstructing Gross Income

Income Formula

Audit Issues

Cashflow

Employee vs. Independent Contractor

Lease Drivers

Appendix

Gross Receipts Formula, Exhibit A

Analysis of Schedule C, Exhibit B

Taxi Formula Application, Exhibit C

Examination Summary Checksheet, Exhibit D

Schedule C from I.M. Taxipayer, Exhibit E

City's Substitute for Schedule C, Exhibit F

AUDIT ISSUES

Cashflow

Often, the taxpayer's bank statements will indicate that the taxpayer has cash activity that does not correspond to the income reflected on the return. Most taxi operators pay their taxi expenditures and personal living expenditures in cash prior to depositing their monies.

Like many other cash-basis taxpayers in a cash-basis business, cab drivers tend to keep detailed records of expenses and virtually none to verify income.

A basic fee (often called the flag drop or the entry fee) is charged to each customer as soon as the customer enters the taxicab. If the examiner can determine the approximate number of customers a driver has in a specific period, the amount the driver received for this portion of the taxi fare is easily computed. (The flat fee is regulated by the city that issues the franchise.)

The second portion of the charge each passenger pays, is based on miles traveled while enroute to the destination. The passenger notices the meter readings increase as the miles increase. Therefore it is reasonable to assume that if the examiner could determine the approximate number of miles traveled, he/she could also compute the money received by the driver for mileage.

Several variables must be considered when attempting to reconstruct income. Each driver operates in a different manner. Consequently, the facts differ with each driver. Some drivers only "play the airport" or their favorite, while some ride the streets in their favorite area randomly searching for customers. All drivers pay a fee for the dispatch service and must be available for calls from the dispatcher. Many drivers allege that the dispatcher only notifies favorite drivers who tip well. In any case, it is best to address all the variables during the initial interview.

Notes:

See Exhibit C - Tax Formula Computation

For example, if a driver "plays the airport," he goes to the airport (holding lot) and waits his turn for a fare, pays $2.50 (for leaving the lot), picks up his fare, delivers the passenger to the desired destination, and returns to the lot. In reality, the driver who picks up a passenger at the airport usually delivers that fare to one of the downtown hotels and then picks up another fare at the same hotel. When the second passenger is delivered to the requested destination, the dispatcher has another fare to be picked up in the near vicinity.

(Incidentally, the airport places additional restrictions on each driver.) It limits the vehicle appearance at the airport only to every other day. If the cab number is an odd number, the vehicle can only enter the airport holding lot on odd days, limiting it to 15 days per month.

The second variable is the amount of non-paid miles traveled. It is reasonable to consider that the car is not occupied 100% of the time it is on the road; the actual percentage will vary with each individual driver, but would not be cost effective if greater than 50%.

Another variable is the number of miles the taxicab gets for every gallon of gas used. In Los Angeles and vicinity, taxicabs are almost all 1977 to 1980 vehicles, which get about 12 miles to the gallon. Most drivers, however, insist their vehicles get only nine miles to a gallon.
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Employee vs. Independent Contractor

Revenue Ruling 71-572, 1971-2 C.B. 347 provides that taxi drivers who lease their vehicles from a taxicab company in return for a percentage of the fares that they collect are to be regarded as employees of the company. However, absent other "control" factors, owner/operators who lease the company's services and drivers who lease both the vehicles and the company's services for a fixed amount at regular intervals are not company employees. Their earnings are subject to self-employment tax and related estimated tax payments.

Notwithstanding Rev. Rul. 71-572, the Los Angeles District concluded that the drivers audited were generally employees because other "control" factors existed which are not present in the ruling's factual situations. If a specific factual situation is not covered by Rev. Rul. 71-572, then no conclusion should be drawn based solely on the vehicle's ownership. This is just one of the factors to be analyzed in determining whether a common law employer-employee relationship exists. See Rev. Rul. 87-41, 1987-1 C.B. 296. Among the factors which should be examined in determining whether an employer-employee relationship exists are:

(1) the degree of control exercised over the details of the work; (2) the investment in the work facilities; (3) the opportunity for profit or loss; (4) whether the type of work is part of the principles regular business; (5) the right of the company to discharge the driver; (6) the permanency of the relationship; and (7) the relationship the parties think they are creating.

While the degree of control exercised over the details of the work is important, the crucial test lies in the right to control (1) the manner in which the service is to be performed; (2) the means to be used; and (3) the result to be obtained.

In the Los Angeles project, the facts indicated that the examined taxicab drivers should generally be regarded as employees. In order for a taxicab company to meet its many franchise requirements, all of its drivers (lease drivers as well as owner/operators) must follow the appropriate rules and regulations. Although all drivers can theoretically refuse to take a given dispatch order, their ability to refuse without suffering adverse consequences is directly related to the length of time that the driver has been with the company. Their ability to refuse such orders is not tied to the ownership of the vehicle. Furthermore, no distinction by the company is made between the owner/operators and the lease drivers in terms of assignments, the hours to be worked, or the fares to be charged. The company can discharge owner/operators as easily as lease drivers because the only way a person can drive a taxi is to be included under the franchise granted to the company. The car must be painted in the company colors and the car must be included within the number of vehicles allowed in the company fleet. It must also be included in the company property damage insurance policy.

Other cab companies have credit customers who pay drivers with a voucher. That type of driver (who submits vouchers) is an employee. The vouchers are submitted to the company, who accepts them as payment of the driver's fees and reimburses the drivers for the amount. The creditor is then billed and the cab companies receive the payment. For example, a driver who is assigned a particular school run, is required to pick up several handicapped children from their homes, at a particular time every morning, deliver them to school and back home every day. The company does exercise the necessary control required to classify those drivers as employees.

The Service's ability to reclassify an individual from an independent contractor to an employee with respect to the employer's liability for employment tax may be limited by the application of section 530 of the Revenue Act of 1978. Section 530 creates certain standards of "reasonable" taxpayer behavior which ensure that the employer's employment tax liability (but not the employee's) will be relieved if it misclassifies workers. To obtain section 530 relief, the employer must classify all workers in similar positions in the same fashion, file all required information returns (including Forms 1099) and have a reasonable basis for the classification scheme. The reasonable classification basis can be satisfied if the employer relied upon: (1) a revenue ruling or judicial precedent; (2) a long-standing classification practice of a significant portion of the industry; (3) an earlier examination where the classification of the workers was not challenged by the Service; or (4) some other reasonable basis for the classification. Section 530's relief is limited to employment taxes and it does not relieve the misclassified workers from their respective employment tax liabilities.
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Lease Drivers

Hardly any owner-operators report lease income, although most companies/owners do lease out one or more of their vehicles. The lease rate in 1984 was $40./day and is as high as $72./day, currently. The lease drivers are not issued F.1099s (as required) and no one admits to maintaining records of the day the car(s) were leased. Therefore, the examiner must usually know from some other source, who the lease driver is to get a more accurate picture of the company business. One way to determine which owner-operators had lease drivers is to note the companies who paid workman's compensation, if the city where the company operates requires it.

Findings in Los Angeles project revealed that less than 40% of lease drivers filed tax returns. Many of those who did file, did so only because their spouses had worked somewhere and received a W-2. If the lease driver is issued F.1099's, they should be reconciled to the taxpayer's gross income.

The number of lease drivers and the amount of lease income can be verified, by the statements of income filed with the city. Bank statements may also indicate periodic lease payment (approximately $200 to $400 a week) and the taxi company records will indicate which lease drivers the taxpayer has.

The taxi companies are self-insured and as such, must keep records of the lease drivers of all the taxi owners. The lease driver's driving records and personnel history are reviewed prior to being allowed to lease a taxi from a franchise. These records also serve as a source of a substantial number of non-filers. Most lease drivers work sporadically and frequently do not report the income or pay tax on it

Examination Technique

Compare the taxi owner's lease income to the amount of income reported to the city, the workmen's compensation paid, as well as the estimated lease income from the number of weeks the taxi is leased. (All these figures are available in the taxi company records.) The estimated income total should be compared to an estimated income number based on the formula. The number of days per week the taxi was being leased, the amount of gas used, the driver's age, place of residence and the driver's method of operation are to be considered in using the formula.

Taxicab Audit

TABLE OF CONTENTS

Chapter I
Preface
 
Chapter II
 
General Information
 
Chapter III
 
Audit Techniques
Pre-Audit
 
Books & Records
 
Reconstructing Gross Income
 
Income Formula
 
Chapter IV
 
Audit Issues
 
Cashflow
 
Employee vs. Ind. Contr
 
Lease Drivers
 
Exhibit I Gross Receipts Formula - Exhibit A
 
Exhibit II Analysis of schedule C - Exhibit B
 
Exhibit III Taxi Formula Application - Exhibit C
 
Exhibit IV Audit Summary Checksheet - Exhibit D
 
Exhibit V Schedule C from I.M. Taxipayer - Schedule
 
Exhibit VI City's Substitute for Schedule C - Schedule 2

Market Segment Specialization Program

Taxicab Overview

Preface

The information contained in this publication was developed and compiled in the Los Angeles District by Revenue Agent Arlene Moncrief, under the direction of Group Manager George Rey. We also acknowledge the contributions from other revenue agents of the ATLAS group in the Glendale office.

The initial audit of taxicab drivers in the Los Angeles District was begun in connection with the examinations of two corporate taxicab companies. Approx- imately 650 taxi drivers were under audit during the years 1987 to 1989, with average adjustments of $8,000 and 7 hours per case year.

In order to provide for an equitable and consistent approach to all taxpayers under audit, a special "formula" was developed. This formula which was computed in three steps, incorporated information secured from the taxicab drivers, the Department of Transportation, taxicab companies, prevalent gas prices, etc., and other available data, such as number of days worked, miles driven, miles per gallon, number of paid trips and the taxi rates charged.

District Counsel, Appeals and attorneys from the taxicab companies, reviewed the (formula) computation used by the examining agents to determine gross income from operating taxicabs. The government and taxpayer representatives ultimately agreed on the validity of this alternative method of computing income and found that it was fair and defensible in a court of law.

Employment tax adjustments were also issued to the taxi companies that employed certain drivers to provide taxi service to credit customers, using the voucher system. Credit customers included schools, nursing homes, corporations and other organizations needing transportation at specific locations and hours each day.

Los Angeles is not what you would call a "taxi town," because most of its people drive their automobiles rather than use taxis or public transportation services. However, we believe that taxi drivers all over the nation operate in a manner similar to that of Los Angeles. Accordingly, our experience and the use of the gross income formula should prove to be an effective compliance alternative and have a significant impact in taxi city areas, such as New York, Boston, Washington, D.C., Philadelphia, Atlanta, Las Vegas, Denver, St. Louis, San Francisco and Austin.

Although the booklet presents only an overview of the study conducted by the Los Angeles District, it should serve as a guideline for taxicab examinations across the country.

General Information

At one time, cab companies required cab drivers to report the meter readings and the money collected to a company official at the end of their shift. The drives were employees who received a minimum salary and a commission at the end of the pay period. In that scenario, income from tips was the big issue. Nowadays, a company finds it easier to charge drivers a flat rate for using the vehicles, and not have the problems of employment taxes and the review and manipulating of meter readings. This method of operation for the cab companies is the subject of Revenue Ruling 71-572 (1971-2CB347).

Taxicab companies are issued franchises by a political body or organization, such as the county, city, airport, etc., to operate in their respective jurisdiction. In order to get the franchise, a company must guarantee that its vehicles will be in uniform or clean apparel, available at specified times and have a specified response time rate.

There is also a franchise fee, costing between $25,000 to $40,000 that drivers must pay to the taxicab company. If a taxi does not meet the requirements of the franchise, it is referred to as a "bandit" and is considered illegal and subject to fines. Taxicab companies encourage their drivers to drive 10-12 hours per day, six day a week, and they must have drivers available to answer the radio dispatch within minutes of the customer's request to keep the license.

Since taxi drivers are treated as independent contractors, no record of fares earned is maintained by the company. If the cab company owns the taxis, the driver must pay a rental fee for the use of the vehicle. The rental fee is computed on a weekly basis and may include charges for property damage insurance. Drivers who own their vehicles are allowed to operate under the company license, but they are charged a fee for the dispatch service and insurance.

Notes:

Revenue Ruling 71-572, 1971-2 CB 347, Situation 1

An average driver in the Los Angeles area earns about $200 per day, and often these drivers will work long hours to earn enough money to buy the taxicab franchise and become a taxi owner operator. Normally these drivers pay the $25,000 to $40,000 in full within a year of purchase.

The operations of a taxicab company are regulated by the city (Transportation Dept.). The city sets the fee structure and makes periodic inspection of the meters, to ascertain the propriety of the charges to the public, and that drivers are maintaining and keeping for two weeks, the daily logs of passenger pick-ups and destinations, as required for the police

The city of Los Angeles also requires the taxi owners to file income statements with the city, to ensure that they are operating their cabs in a businesslike (profitable) manner. It also restricts the number of taxi licenses issued, to make sure that these licenses are used as intended, and that the city has enough taxis to serve it's population.

Taxicab companies in Los Angeles are self-insured and do not offer collision insurance. Allegedly, drivers have numerous accidents and as a result, owners often purchase older and larger vehicles, which are less fuel-efficient and require substantial amount of repairs. The City is in the process of requiring taxi owners to operate taxis that are 5 years old or less, in order to provide the public, a better and safer transportation.

AUDITING TECHNIQUES

Pre-audit Analysis

To facilitate the audit of taxi cab drivers, the agent should obtain the following source documents, prior to the examination of the tax returns:

Books and Records

Generally, the taxicab industry is characterized by unsophisticated taxpayers keeping poor records or no records at all. We found, while examining over 600 taxi driver returns in Los Angeles, that driver who maintained daily records had little regard for the accuracy or the integrity of the records and that they were more or less self-serving documents of low credibility.

Among the items that should be included in these examinations are the taxpayer's waybills. A waybill is a daily summary of the taxi driver mileage and fares collected. Tax drivers submit the original document to their taxi company. The taxi companies do not audit, inspect or verify the accuracy of these records. Drivers often deduct expenses paid in cash prior to recording the daily receipts.

The drivers should have receipts and cancelled checks for their expenditures. Documented verification of miles driven will be especially important if the driver does not agree with the estimated paid miles derived from "the formula."

Deduction of payment of worker's compensation (or issuance of Form 1099's) by the taxi owner indicates he has a lease driver. The workmen's compensation deduction is either alone or combined with the dues paid to the taxi company. Most of the taxi owner operators failed to report lease income.

Income

The three income probe methods prescribed by IRM 4235 should be used to determine the actual income for each of the years in question. First, the taxpayer's bank deposits are to be analyzed. Second, an indirect method should be employed to reconstruct income from the taxi operation, which in this situation represents a formula that has been developed for this activity. Thirdly, income is to be reconstructed also from the personal living expenses, which the taxpayer prepares and submits on Form 4822. The results from the three methods are compared and the differences are analyzed to determine income.

If a taxpayer has unreported income from driving or leasing a taxi, and the taxpayer has failed to maintain records of that activity, the taxpayer is in violation of the accounting records maintenance requirement of Treas. Reg. 1.446-1(a)(4). The taxpayer's failure to keep records also means that the taxpayer has not adopted any method of accounting for that activity. Under these circumstances, the Internal Revenue Service has specific statutory authority under section 446(b) of the Internal Revenue Code to compute the taxpayer's income under a method of accounting that in the opinion of the Service clearly reflects the taxpayer's income.

Notes:

Pre-Audit Resources

a. Waybills
 
b. Income statements filed with the city
 
c. Company records of lease drivers
 
d. DMV records
 
e. IRP transcript
 
When a taxpayer fails to maintain records, necessitating income reconstruction by the Service under a formula, and the taxpayer takes the matter into litigation, courts view the Service's method of accounting to be presumptively correct. It is not necessary for the formula to be precise in order for the formula to retain the presumption that it is a method of accounting that clearly reflects income. A taxpayer may be able to show that one of the calculations in one of the steps should be modified. However, even if the taxpayer is able to make this factual showing, the remaining elements of the formula will retain their presumption of correctness. See Batt v. Commissioner, T.C. Memo. 1965-104

Although the conservative approach of using all three methods to determine income is recommended, however, if lack of information or resources restrict the examination, a reconstruction of income based on any one of the three methods should be sustained in court.

Cash on Hand

It is important from the start of the audit to establish clearly taxpayer's explanations on accumulated cash, since the taxpayers frequently indicated that their accumulation of cash occurred prior to the years under audit.

This is important, whether or not the taxpayer is using cash from the taxi operation to pay for personal expenses or the expenses of the taxi operation, prior to reporting the fares collected

If the taxi operators are recent immigrants, securing transcripts of all returns filed can verify sources of cash. Forms filed with the Immigration Department will indicate the assets that they brought from abroad. Taxpayer's previous occupations, inheritances, loans, gifts and other sources of income must be analyzed.

Mileage

Use cab repair receipts to reconcile the actual miles driven and compare to the miles estimated for use with the formula. (As more taxi drivers were audited in the Los Angeles project, they became aware of our approach and began to submit repair bills not having odometer readings). One method to determine the amount of mileage driven, when repair bills do not have odometer readings, is by estimating mileage from oil bills, tire purchases, tune-ups, and other regular maintenance services.

Example:

5 oil bills submitted indicate 15 oil changes x 3,000 miles per oil change = 45,000 miles driven.

Notes

3 Ways to Estimate G/R

Fuel Consumption

Gas expenditures should correspond to the amount of miles the taxi was actually driven. During audit, many taxpayers claimed that the gas expenses were overstated, but this fact could be verified by the actual miles driven from odometer readings or from information filed with the local Department of Transportation. The analysis of gas expenditures is very important, since the formula is based on the consumption of gas.

Reconstructing Income

The Formula to Estimate Income

An indirect method, a formula, can be used to reconstruct income, or gross receipts, when it is determined that the taxi-operator does not have adequate records.

In Warren R. Batt Sr. and Optat M. Batt v. Commissioner, the Tax Court ruled the adequate records should be maintained by the petitioner, and that income can be reconstructed by a reasonable formula or method when he failed to do so.

Upon review of the Department of Transportation taxi rates and gas prices from 1984 to 1986 gross income was determined as based on these factors:

  1. A flag drop of $1.90 for the first 1/5 or 64 seconds.
  2. $0.20 for each additional 1/8 mile or part from 1986. $0.20 for each additional 1/7 mile or part prior to 1986.
  3. $0.20 for each 40 seconds waiting time and/or traffic delay.
  4. $24.00 flat rate per trip (group) or taxicab trips between Los Angeles International Airport and Downtown Los Angeles.
  5. $2.50 surcharge for trips origination at Los Angeles International Airport.
  6. Gasoline averaged $.86/gallon to $1.23 per gallon from 1984 to 1986.
Notes:

Warren R. Batt Sr. and Optat M. Batt v. Commissioner

The formula determines total miles driven based upon the cost of gasoline and average mileage, per gallon.

In the case cited above, the taxi was estimated to operate at a 50% occupancy rate. This is a conservative estimate since the taxi used its radio for return fares.





           Total mileage


           x       50%


           Subtotal #1


           Subtotal #1


           x     $1.40


           Subtotal #2


           +total flag drop*


           Subtotal #3


           + 10% for estimated tips





                 Total Gross Receipts





 * total flag drop collected for the year


   (no. of days x customer per day)


   x the $1.90 entry rate.



Audit Issues

Cashflow

Often, the taxpayer's bank statements will indicate that the taxpayer has cash activity that does not correspond to the income reflected on the return. Most taxi operators pay their taxi expenditures and personal living expenditures in cash prior to depositing their monies.

Like many other cash-basis taxpayers in a cash-basis business, cab drivers tend to keep detailed records of expenses and virtually none to verify income.

A basic fee (often called the flag drop or the entry fee) is charged to each customer as soon as the customer enters the taxicab, If the examiner can determine the approximate number of customers a driver has in a specific period, the amount the driver received for this portion of the taxi fare is easily computed. (the flat fee is regulated by the city that issues the franchise.)

The second portion of the charge each passenger pays, is based on miles traveled while enroute route to the destination. The passenger notices the meter readings increase as the miles increase. Therefore, it is reasonable to assume that if the examiner could determine the approximate number of miles traveled, he/she could also compute the money received by the driver for mileage.

Several variables must be considered when attempting to reconstruct income. Each driver operates in a different manner. Consequently, the facts differ with each driver. Some drivers only "play the airport" or their favorite, while some ride the streets in their favorite area randomly searching for customers. All drivers pay a fee for the dispatch service and must be available for calls from the dispatcher. Many drivers allege that the dispatcher only notifies favorite drivers who tip well. In any case, it is best to address all the variables during the initial interview.

Notes: See Exhibit C - Tax Formula Computation

For example, if a driver "plays the airport," he goes to the airport (holding lot) and wait his turn for a fare, pays $2.50 (for leaving the lot), picks up his fare, delivers the passenger to the desired destination, and returns to the lot. In reality, the driver who picks up a passenger at the airport usually delivers that fare to one of the downtown hotels and then picks up another fare at the same hotel. When the second passenger is delivered to the requested destination, the dispatcher has another fare to be picked up in the near vicinity.

(Incidentally, the airport places additional restrictions on each driver.) It limits the vehicle to appearance at the airport only to every other day. If the cab number is an odd number, the vehicle can only enter the airport holding lot on odd days, limiting it to 15 days per month.

The second variable is the amount of non-paid miles traveled. It is reasonable to consider that the car is not occupied 100% of the time it is on the road; the actual percentage will vary with each individual driver, but would not be cost effective if greater than 50%.

Another variable is the number of miles the taxicab gets for every gallon of gas used. In Los Angeles and vicinity, taxicabs are almost all 1977 to 1980 vehicles, which get about 12 miles to the gallon. Most drivers, however, insist their vehicles get only nine miles to a gallon.

Employee vs. Independent Contractor

Revenue Ruling 71-572, 1971-2 C.B. 347 provides that taxi drivers who lease their vehicles from a taxicab company in return for a percentage of the fares that they collect are to be regarded as employees of the company. However, absent other "control" factors, owner/operators who lease the company's services and drivers who lease both the vehicles and the company's services for a fixed amount at regular intervals are not company employees. Their earnings are subject to selfemployment tax and related estimated tax payments.

Notwithstanding Rev. Rul. 71-572, the Los Angeles District concluded that the drivers audited were generally employees because other "control" factors existed which are not present in the ruling's factual situations. If a specific factual situation is not covered by Rev. Rul. 71-572, then no conclusion should be drawn based solely on the vehicle's ownership. This is just one of the factors to be analyzed in determining whether a common law employer-employee relationship exists. See Rev. Rul.87-41, 1987-1 C.B. 296.

Among the factors which should be examined in determining whether an employer-employee relationship exists are:

While the degree of control exercised over the details of the work is important, the crucial test lies in the right to control In the Los Angeles project, the facts indicated that the examined taxicab drivers should generally be regarded as employees. In order for a taxicab company to meet its many franchise requirements, all of its drivers (lease drivers as well as owner/operators) must follow the appropriate rules and regulations. Although all drivers can theoretically refuse to take a given dispatch order, their ability to refuse without suffering adverse consequences is directly related to the length of time that the driver has been with the company. Their ability to refuse such orders is not tied to the ownership of the vehicle. Furthermore, no distinction by the company is made between the owner/operators and the lease drivers in terms of assignments, the hours to be worked, or the fares to be charged. The company can discharge owner/operators as easily as lease drivers because the only way a person can drive a taxi is to be included under the franchise granted to the company. The car must be painted in the company colors and the car must be included within the number of vehicles allowed in the company fleet. It must also be included in the company property damage insurance policy.

Other cab companies have credit customers who pay drivers with a voucher. That type of driver (who submits vouchers is an employee. The vouchers are submitted to the company, who accepts them as payment of the driver's fees and reimburses the drivers for the amount. The creditor is then billed and the cab companies receive the payment. For example, a driver who is assigned a particular school run, is required to pick up several handicapped children from their homes, at a particular time every morning, deliver them to school and back home every day. The company does exercise the necessary control required to classify those drivers as employees. The Service's ability to reclassify an individual from an independent contractor to an employee with respect to the employer's liability for employment tax may be limited by the application of section 530 of the Revenue Act of 1978. Section 530 creates certain standards of "reasonable" taxpayer behavior which ensure that the employer's employment tax liability (but not the employee's) will be relieved if it misclassifies workers. To obtain section 530 relief, the employer must classify all workers in similar positions in the same fashion, file all required information returns (including Forms 1099) and have a reasonable basis for the classification scheme.

The reasonable classification basis can be satisfied if the employer relied upon:

Lease Drivers

Hardly any owner-operators report lease income, although most companies/owners do lease out one or more of their vehicles. The lease rate in 1984 was $40./day and is as high as $72./day, currently. The lease drivers are not issued F.1099s (as required) and no one admits to maintaining records of the day the car(s) were leased. Therefore, the examiner must usually know from some other source, who the lease driver is to get a more accurate picture of the company business. One way to determine which owner-operators had lease drivers is to note the companies who paid workman's compensation, if the city where the company operates requires it.

Findings in Los Angeles project revealed that less than 40% of lease drivers filed tax returns. Many of those who did file, did so only because their spouses had worked somewhere and received a W-2. If the lease driver is issued F.1099's, they should be reconciled to the taxpayer's gross income.

The number of lease drivers and the amount of lease income can be verified, by the statements of income filed with the city. Bank statements may also indicate periodic lease payment (approximately $200 to $400 a week) and the taxi company records will indicate which lease drivers the taxpayer has.

The taxi companies are self-insured and as such, must keep records of the lease drivers of all the taxi owners. The lease driver's driving records and personnel history are reviewed prior to being allowed to lease a taxi from a franchise. These records also serve as a source of a substantial number of non-filers. Most lease drivers work sporadically and frequently do not report the income or pay tax on it.

Audit Technique

Compare the taxi owner's lease income to the amount of income reported to the city, the workmen's compensation paid, as well as the estimated lease income from the number of weeks the taxi is leased. (All these figures are available in the taxi company records). The estimated income total should be compared to an estimated income number based on the formula. The number of days per week the taxi was being leased, the amount of gas used, the driver's age, place of residence and the driver's method of operation are to be considered in using the formula.

Exhibit A

Formula for Computing Taxi Gross Receipts

Step 1--Amount earned for entry





         Number of customers per day


         X Days worked per year =


         Approximate trips per year


         X Entry Rate





               Total earned entry amount





Step 2--Business Miles Driven





         Total amount paid for gas


         Divided by Cost per gallon


         Number of gallons used


         X Miles per gallon





               Total miles driven





         Less Percentage of non-business miles





               Total Business mileage





Step 3--Gross Receipts & Unreported Income





         Business mileage (from Step 2)


         X Rate charged per mile *


         Taxi fares based on miles


         + Total Entry Amount (from Step 1)


         Total fares collected


         + 10% tips


         Estimated gross receipts


         + Lease rental income


               Total Gross Receipts





         Less Gross receipts per tax return





               Unreported income





 * from Dept. of Trans. of taxi rates & gas prices

Exhibit B

Analysis of Schedule C

Example: I.M. TAXIPAYER

Exhibit C

Taxi Formula Application

Examples - Results from analysis of I.M. Taxpayer, Schedule C


                                     1984     1985      1986     1987     1988








Step 1 - Amount earned for entry





Number of customers per day            10       10        10      10       10


X Days worked per year              x 225    x 225     x 225   x 225    x 225


Approximate trips per year           2250     2250      2250    2250     2250


X Entry rate                       $ 1.90   $ 1.90    $ 1.90   $1.90   $ 1.90





Total earned entry amount          $ 4275   $ 4275    $ 4275   $4275   $ 4275



Step 2 - Business miles driven

Total spent for gas                $    0   $    0    $    0    $    0   $ 3710








divided by Cost per gallon         $ 1.15   $ 1.23    $ 1.08    $ 1.00   $ 1.20


Number of gallons used                  0        0         0         0     3092


X Miles per gallon                     12       12        12        12       12


Total miles driven                      0        0         0         0    37104


X Percent of non-business miles    x  50%   x  50%    x  50%    x  50%   x  50%





Total business miles                    0        0         0         0    18552
Step 3 - Gross Receipt & Unreported Income

Business miles (step 2)                 0        0         0         0    18552


Taxi rate charged per mile         $ 1.40   $ 1.40    $ 1.40    $ 1.60   $ 1.60


Taxi fares based on miles          $    0   $    0    $    0    $    0   $29683


+ Total entry amount (step 1)      $ 4275   $ 4275    $ 4275    $ 4275   $ 4275


Total fares collected              $ 4275   $ 4275    $ 4275    $ 4275   $33958


+ 10% tips                            428      428       428       428     3396





Gross receipts                     $ 4703   $ 4703    $ 4703    $ 4703   $37354


+ lease rental income              $    0   $    0    $    0    $    0   $15000


Total gross receipts               $ 4703   $ 4703      4703    $ 4703   $52354


less gross receipts per return     $    0   $    0    $    0    $    0   $17000





Unreported income                  $ 4703   $ 4703    $ 4703    $ 4703   $35354



Exhibit D

Summary Checksheet of Taxicab Audit Considerations

I.   History


     A. Cash industry


     B. Poor record keeping


     C. Unsophisticated taxpayers


           1. Immigrants


                 a. Unfamiliar with tax law & record keeping


                 b. Easy prey for unethical tax preparers


           2. Camaraderie and willingness to comply


           3. Vulnerability to unethical tax return preparers





II.  Audit Techniques


     A. Books & records for actual audit


           1. Waybills


                 a. Taxpayer's copies 


                 b. Copies filed with the taxi companies


           2. Bank Statements


           3. Expense Receipts


                 a. Gas


                 b. Auto repairs


                 c. Workmen's compensation 


                 d. Insurance dues


           4. Insurance settlements


                 a. Copy of cancelled check


                 b. Copy of settlement


           5.  Loan agreements


                 a. Obtain copy of agreement and of deposit slip from borrower


                 b. Inspect cancelled check to borrower


                 c. Determine if the loan is accepted


           6. Purchase and sales agreement


           7. Lease agreements with lease drivers


           8. Review of F.1099's from owner to lease driver 





     B. Pre-audit examination


           1. Reconcile waybills to income statements filed with City


           2. Obtain schedule of lease drivers


                 a. Compare taxi company records to taxpayer's tax return


                 b. Compare financial statement filed with City to tax return,


                    looking for unreported lease income


           3. Dept. of Motor Vehicles


                 a. Number of autos owned


                 b. History of accidents





           4. Records filed with Federal agencies


                 a. F.8300 Currency Transaction Report


                 b. IRP transcript and F.1099's 


                 c. Forms filed with Immigration (if applicable)


                 d. F.4822 Personal Living Expenses





     C. Gross Receipts


           1. Bank Deposit analysis


                 a. Interest income


                 b. Source of deposits





           2. Initial interview


                 a. Establish cash on hand (when/how accumulated, how much,,


                    over what period of time)





                 b. Reconstruct income using F.4822, Statement of Personal


                    Living Expenses plus cash payments for taxi expenditures


           3. Residency and former occupations (in and outside of U.S.)


           4. Method of taxi operation


                 a. Airport vs. city/hotels


                 b. Number of cities driver has licenses to operate in


                 c. Number of years taxpayer has been taxi driver


                 d. Taxpayer's circumstances 


                       i. Physical condition


                      ii. Taxpayer's age 


                     iii. Handicap





III. Examination of tax returns


     A. Estimate taxpayer's income 


           1. Formula


           2. Lease driver income


           3. Review waybills


           4. Substantiate major expenses


                 a. Repair bills--copy invoices with mileage listed.  If no


                    such copies, copy receipts for oil or tire changes


                 b. Gas


                 c. Dues


                 d. Workmen's compensation 


                 e. Liability insurance


     B. Employee vs. Independent Contractor


     C. Lease drivers

Schedule 1

Information from Schedule C (Form 1040)

1988


Name of Proprietor -  I.M. Taxipayer





Part I Income





  Gross Receipts             $15,000


  Other Income                 2,000


  Gross Income               $17,000





Part II Deductions





  Dues and Pubs.             $3,000


  Insurance                   7,000


  Laundry/Cleaning              200


  Repairs                     5,000


  Other Expenses


   Workmen's Comp.   1,800 


   Gasoline          3,710


   LAX Surcharges    1,200


   License             935


                              7,645


   Total Deductions         $22,845





   Net Profit              ($5,845)

Schedule 2

Sample Form of City's Substitute Schedule C

ALL UITD OWNERS SUBMIT THIS FORM INSTEAD OF THE SCHEDULE "C". PLEASE BRING THIS TO THE UITD OFFICE AS SOON AS POSSIBLE. THIS IS A REQUIREMENT OF THE CITY OF L.A. DOT, AS PREVIOUSLY THE SCHEDULE "C" WAS REQUIRED. THIS FORM MUST BE TURNED IN INSTEAD OF THE SCHEDULE "C". THIS FORM MUST BE SENT TO THE CITY BY APRIL 15.


Revenue


  Owner's Taxicab Fares Collected................................$24,000


  Second Driver's Lease Payments ................................ 12,000


  Second Drivers Fares Collected $35,000


  Other (specify source) This pertains to your UITD taxi only...


     TOTAL REVENUE...............................................$36,000





Expenses


  Association Dues...............................................$ 3,000


  Gasoline........................................................ 3,710


    Total Miles Driven 40,000


    Repairs and Maintenance of Taxicab


    (includes tires, oil, etc.)..................................$ 5,000


       Car Model           CHEVY


       Cost                $10,000


       Date Purchased      1984


  Taximeter Depreciation....................................


  Radio Depreciation........................................


  Liability Insurance...........................................$ 7,000


  Uniforms..................................................


  Interest..................................................


  DMV Taxes.................................................


  Los Angeles City Permits......................................    935


  Other City or County Permits..............................


  Workman's Compensation........................................  1,800


  Other Expenses (itemize)


    car wash....................    200


    LAX surcharges..............  1,200


     TOTAL EXPENSES.............................................$22,845





Net Income......................................................$13,155








I declare under penalty of perjury that the above amounts


are true and correct.





Dated at Los Angeles, California on 04-15-87


                                                             


(month, day, year)








__________________________________________        _____________


Signature                                         Cab #




OTHER LINKS:
 

ISSUES IN FARE POLICY: THE CASE OF THE NEW YORK TAXI INDUSTRY
by Bruce Schaller - Presented at Transportation Research Board 1998 Annual Meetings (and other relevant documents - aj)

ALLTAXI.COM
"AllTaxis.com has been set up as a common ground for those
working in the Los Angeles taxi industry. Here you can find news
postings and postings by those in the industry. Your participation
here is relevant to the success of AllTaxis.com which is not in any
way affiliated with any taxi company, taxi owners, LADOT, ATS
or any organization. AllTaxis.com is independent unto itself and
does not sell, trade or offer in any way whatsoever information
provided to AllTaxis.com. " (OFFERS A MESSAGE BOARD WHERE IT WILL REMAIN POSTED FOR 365 DAYS)

How the Taxicab Industry Was Junked by Burton H. Wolfe
A 'review' of the "independent contractor" status....