Trucking is inherently an interstate, and even international, industry. Sure, some companies may never cross state lines, but at some point, most will. Typically, states (and Canadian provinces) collect fuel taxes for vehicles traveling their roadways to pay for road maintenance and other infrastructure projects. With their large fuel tanks, though, some trucks may never stop in a state when they pass through. The result is wear and tear on the roads, but no revenue for the state.
To combat this, the International Fuel Tax Agreement (IFTA) was agreed upon as a mechanism for collecting taxes accrued when a vehicle travels through a state. IFTA is administered by local jurisdictions, which include the 48 contiguous U.S. states and 10 Canadian provinces. Motor carriers operating the following vehicle types must file quarterly IFTA fuel tax reports:
- Any vehicle with at least two axles and exceeding 26,000 pounds gross vehicle weight.
- Any vehicle with three or more axles regardless of weight.
- Any vehicle equipment used in combination when the combination exceeds 26,000 pounds gross vehicle weight.
Carriers that fall under the requirements must:
- Obtain an IFTA license.
- Keep records for all fuel purchased, received and used during each reporting period.
- Keep detailed distance records showing the taxable and nontaxable use of fuel, distance traveled for both taxable and nontaxable use, and distance recaps for each vehicle for each jurisdiction in which the vehicle operated.
Noncompliance risks
Carriers that fail to file their IFTA tax records and payments on time face penalties of as much as 10% of the unpaid taxes and including interest payments. If IFTA auditors determine that record-keeping requirements are not being met, they may issue an inadequate-records assessment. They can lower miles per gallon to 4 or reduce it by 20% if they suspect a carrier is inflating mpg to pay lower taxes. And any failure to comply with IFTA provisions can be grounds for suspension or revocation of the IFTA license.
Audit basics
Jurisdictions are required to conduct regular audits of licensees to ensure compliance and proper revenue collection. However, not all licensees are audited, explained Corrina Peterson, transport editor with J. J. Keller & Associates Inc. IFTA must audit an average of 3% of their accounts (not including new licensees) annually, and at least 15% of those audits must be for “low-distance accounts.” These are accounts that had the lowest number of miles/kilometers reported in all member jurisdictions the previous year. An additional 25% of audits must be for high-distance accounts.
Auditors review the licensee’s record-keeping and tax returns, check for possible errors or omissions, and analyze the returns and note trends or variances.
Red flags to avoid
While a small portion of licensees face an audit each year and are generally randomly chosen, there are several red flags that can increase the chance a carrier will be chosen for an audit, according to Peterson.
1. Late returns
Carriers that miss deadlines or struggle with record-keeping are at increased risk of an audit. Peterson said carriers can avoid this red flag simply by filing their returns on time. To ensure returns are filed on time, carriers should have in place procedures and controls that, at a minimum:
- Train drivers in proper collection of fuel receipts and trip reports.
- Train employees, including dispatchers and drivers, on proper record-keeping.
- Train drivers on using automatic recording devices, hubodometers or GPS units to track distance.
- Train administrative personnel on data entry processes and timelines for doing so.
- Train employees on record checking and reconciliation procedures.
- Train employees on record retention requirements, schedules and purging schedules.
2. Amended returns
While drivers and carriers should address errors in tax returns, a large number or consistent trend of amended returns signals to auditors the potential for problems, whether in record-keeping procedures, data entry, or trip and fuel data collection processes.
Besides completing the returns accurately, Peterson advises carriers to look for common mistakes such as missing or gap miles (this could include miles driven by mechanics, empty miles, deadhead miles and bobtail miles). Also, verify that the ending odometer reading for one month matches the beginning reading for the next month.
Missing or illegible fuel receipts are also indications of potential problems, as are units with no activity. Scrutiny of the driver trip report can also identify potential issues before an auditor sees them. Inaccurate or incomplete driver trip reports may cause auditors to ask for secondary information to verify tax return information. Finally, check individual vehicle mileage reports for distance accuracy against routes.
3. Fluctuating mpg or fuel purchases/consumption
Large discrepancies in mpg for the type of vehicle or significant fluctuations in quarterly fuel usage raise suspicions. Peterson suggests double-checking mpg to ensure the math is correct and verify dates and amounts of fuel purchases.
When it comes to mpg reporting, IFTA auditors will check the type of vehicle against the mpg it is expected to achieve, and numbers far from the norm may be questioned. Peterson advises knowing the vehicles you operate, how they typically operate and the average mpg of each to verify the accuracy of the reports.
4. Large refunds
If a carrier is owed money, IFTA will gladly refund it, but a disproportionately large refund raises a red flag. Avoid this by filing only for refunds you are entitled to, and only in the amounts you are entitled. Again, documentation is key. Fuel purchases are only eligible for reimbursement if the licensee paid the fuel tax at the time of purchase. Peterson said licensees should verify dates and amounts from all fuel receipts to ensure they are included in the correct reporting period.
5. Closing the account
Some jurisdictions perform audits on all carriers that close their accounts, and most jurisdictions regularly share information on suspended/revoked licenses and closed accounts with each other and with law enforcement to ensure a revoked account is not opened in another jurisdiction or that the carrier is not operating illegally.
Maintaining proper records and adhering to records retention periods are key to avoiding this misstep. If a carrier has closed its account, it can purchase a temporary fuel permit if necessary.
Compliance options
IFTA reporting is a complicated process that requires strict attention to record-keeping procedures. Outsourcing the process to third-party service providers is an approach many carriers have taken. The service tracks records and ensures IFTA reports are filed in a timely manner, are accurate, and that the carrier pays the tax it is required to and no more. Other benefits carriers may find include conservation of internal resources, including personnel, and support in case of an audit.
Among the tasks a third-party service provider may provide are:
- Collection and data entry of driver trip reports, fuel receipts and toll information into a database, retention of the information as required by IFTA, and purging services according to records retention timelines.
- Conducting an audit of your operations, analyzing the data and correcting errors to meet IFTA compliance requirements.
- Identification and correction of discrepancies when appropriate.
- Management of monthly and quarterly mileage and fuel data for quarterly IFTA reporting.
- Completion and submission of tax returns and disbursement of payments.
- Application for ongoing fuel tax credits and refunds (as appropriate).
- Generating fuel and mileage reports.
- Communication with states on your behalf whenever there are permit changes, such as address changes, return of permits or cancellations.
- Recommendations for permitting needs for the following year and advice on which base state you should use.
- Providing cost reports of total fuel, mileage and authority permits.
- Recommending best practices to help you optimize your fleet efficiencies and tax liabilities.
Carriers that travel across state lines face a number of compliance concerns, and fuel taxes are just one of them. How many states and, most importantly, how many miles were traveled and how much fuel was burned in those states are critical data points that must be collected and properly recorded. Outside compliance specialists are able to dedicate resources to ensuring this information is collected, recorded properly, and IFTA reporting is handled in a timely and accurate manner.
The alternative is paying too much in fuel taxes or not enough, likely triggering an IFTA audit.
Click for more articles by Brian Straight.
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