Have a Tax Question? Ask a Tax Expert
If they trace these records, what are the effects on the employees who were using company vehicles for entirely personal use (mostly family of company owner) and/or had checks written to them directly (not pay checks)?
A: If the deductions are disallowed for lack of employee documentation, then the vehicle usage will be considered taxable income to the employee, the employer will owe the payroll tax, and the employee the income tax. See Pub. 15B, Page 21, for vehicle allocation rules.
If they are auditing 2008, will they also look at 2009 and 2010?
A: Probably so.
Will the employees owe taxes and if so will they be charged penalties for not claiming?
A: If the employee submitted reasonable records to show business use, then the employee is off the hook. If there were never any records at all, then the employee is liable for the tax.
If all the vehicles are leased, and there is no record of mileage, the employees will be required to pay taxes on the value of the vehicle?
A: The value of the vehicle to the employee is taxable as income to the employee if there were no records submitted to support the business use. The use records are the employee's "safe harbor," and places the tax burden entirely on the employer.
And if gas was provided, how is that determined with no receipts or mileage records?
A: Probably using the IRS mileage allocation for the particular tax year times the total vehicle mileage.
And with the check situation, if a check was written, as a gift, income tax will have to be paid.
A: A nontaxable gift under the IRC is one made out of detached and disinterested admiration, love and respect -- and other like charitable impulses. Thus, it is practically impossible for an employer to make a nontaxable gift to an employee. The best that the employer and employee could probably argue is that the income was not earned as personal services and thus not wages subject to social security and medicare tax.
You mentioned the employer would have to pay payroll taxes as well. Will this go towards the employees owed amount?
Will there be a fee or legal charges made against the employee?
A: Penalties and interest.
What is the normal time limit given to pay these taxes/ fees?
A: 10 days. An employee can generally enter into an installment plan with the IRS, which would incur interest. Uncle Sam just wants his money -- the IRS doesn't want to throw employed taxpayers in jail. That's counterproductive.