In a new case, Nurumbi, 2021-79, TC memo 2021-79. 06/30/21, an Uber driver broke the rules, but was at least able to recover some deductions in Tax Court.
Participants in the so-called “gig economy,” ranging from drivers and temporary owners to delivery services, are generally treated as self-employed. As such, the income they receive is fully taxable, but they may be entitled to deduct eligible business expenses to offset part of the tax. In addition, the participant is liable for self-employment tax, but can write off half of the tax on his personal return.
Facts of the new case: The taxpayer, a resident of Arizona, used his Uber account and mobile app to provide passenger transportation in exchange for fares. But he was not the only driver to use the account in the tax year in question.
Notably, the taxpayer recruited friends and family to sign up for Uber under his account. They leased his vehicles, which he had bought through car title loans or at auctions.
Drivers could access the Uber app to view their journeys made and fares collected, but all fare revenue (net of Uber fees) went directly to the taxpayer’s Uber account. There was no written contract between the taxpayer and the other drivers.
Every week, Uber paid the taxpayer for their own driving activity and for that of the drivers on their account. He would subtract his fees and would deposit the remaining funds into a Bank of America (BoA) account. Then the taxpayer would withdraw funds from the BoA account, deposit part of the withdrawn funds into a Banco Bilbao Vizcaya Argentaria (BBVA) account and keep the rest in cash.
The taxpayer paid the drivers their individual income, as shown on Uber’s weekly statements, routinely withholding $ 250 as a vehicle rental fee and occasionally reimbursing the drivers for gasoline, vehicle maintenance and other various expenses. Some of these payments were made by wire transfer from the BBVA account and others were made in cash.
Key points: The taxpayer did not provide the drivers with any documentation showing their payment and the drivers did not submit receipts for gasoline, vehicle maintenance or other miscellaneous expenses. Likewise, the drivers did not keep any logs of expenses incurred while driving on the taxpayer’s Uber account. The taxpayer also did not keep a register or other document showing how much he paid the drivers, either by BBVA transfer or in cash.
The taxpayer’s situation fell apart when Uber issued him a 1099-K that brought in more than $ 542,000 in payments that he left out in his return. The IRS adjusted its 1040 to include unreported income and allowed a deduction for bank transfers to other drivers, but not for cash payments.
End of line: The lack of documentation proved fatal to the taxpayer’s file. The burden of proof is on the taxpayer to establish the total amount he claims to have paid, including cash. Although the Tax Court found the taxpayer’s testimony credible, it upheld the adjustments made by the IRS.
There is a moral to this story: Encourage customers to keep detailed records of their business transactions. The IRS and the courts are unlikely to simply take their word for it if income or deductions are ever challenged. This is especially true for participants in the concert economy who often play fast and loose with the rules.
