The Per Diem Mistake the IRS Will Catch (And Won’t Allow) in an Audit – Episode 50

One of the biggest fears I hear from trucking companies that are looking at a per diem program is this. What if the IRS audits are per diem? And I always have the same answer. If you’re following the rules, an audit should never scare you. What should scare you is using a per diem program that does not follow the rules. The IRS doesn’t create problems for companies that follow their rules.

Welcome to the Driven for Success Podcast. This is the podcast for trucking company owners and executives who want to build better businesses, make better decisions, and keep more drivers without losing control. I’m Mike Ritzema, your host and owner of Superior Trucking Payroll Service, where our mission is simple to help trucking families. This podcast is one of the ways we fulfill that mission. And today we’re talking about truck driver per diem and IRS audits.

Because I found many trucking companies are far more afraid of the audit than they need to be, while other companies probably should be a little more concerned. And the difference isn’t luck, it’s whether you’re actually following the IRS revenue procedures. Before we get into that, I just want to give a quick shout out to Freight Waves and John Kingston. They recently ran an article about our driver pay index, which shows compensation trends for drivers over a series of months. And so it’s been great that they’ve been able to get engaged with that and help pass that information on to other people.

It’s on our website at truckingpayroll.com slash driver dash pay dash index or just go to truckingpayroll.com and it’s in the menu right in the top. It’s yours to look at and we put some conclusions in there every month. We hope it’s helpful to you. Now back to per diem and audits. Whenever someone brings up per diem, it doesn’t take long for them to say, I heard the IRS doesn’t like per diem or my buddy got audited.

Or I just don’t want the IRS on my on the radar. I want them to not even remember me. And here’s what I ask is did the IRS create the trucking per diem rules? Yes. Did they publish how companies are supposed to do it? Yes. But then why would they be upset when you’re doing exactly what they told you to do? The IRS isn’t against per diem.

They’re against people making up their own rules. They’re against people ignoring the rules that they make up. A lot of these stories like the my buddy got audited, your buddy probably got audited for something other than per diem. Your buddy probably got audited for fudging and expense, or because, well, really, the IRS doesn’t always understand trucking, and they’ll see an owner operator, for example, with $250,000 in revenue and $90,000 in fuel, and think there’s no way until they see what a truck requires for diesel. Or they’ll see $30,000 in repairs and think, well, there’s no way they should have that until they realize how much tires and brakes and all the things cost.

And that’s not even rebuilding a motor. So the stories start out with a degree of truth, but then they go into all these other things. So I get that your buddy got audited. I get that you don’t want to get audited. I think those are perfectly reasonable positions, but it wasn’t about per diem.

So it was really about spreading fear because fear spreads a lot faster than facts do. Fear is what sizzles. And if you’ve seen this podcast or listened to this podcast, I’m not a sizzle guy. Let’s let’s eliminate the fear. The IRS has already told us how we should do this.

And I think that surprises people that these rules aren’t hidden. They’re published by the IRS. The current guidance for the amount that you can pay, which is $80 a day, was in revenue procedure 2024-68. Revenue procedures are how the IRS gives out guidance. They’re all on the IRS’s website.

And they’ll update it most years. If the numbers change, they’ll update it, usually in September of each year, effective October 1st, which is the government year for reasons that surpass understanding. But uh they did it last in 2024, and that’s when they moved it up to $80 a day. They didn’t update it last year, and I expect that they’re going to update it this year, but I don’t know. The government does what it does.

That’s not a shot at either party. I’m just saying the government does what it does. Uh, but if you read through revenue procedure 2024-68 and you go to the special rules for the transportation industry, which is where you find the $80 a day, you’ll see that it refers you back to a revenue procedure from you five years earlier, revenue procedure 2019-48, which if you read that refers back to another one and another one. And they cite, they go back to when Pre DM started. Uh, but they explain how Per Diem actually works in 2019-48, who qualifies, which is again, uh can sum it up for you as drivers that are uh subject to hours of service uh and hours of service limitations and are in multiple meals and incidental markets.

It also they really should be gone overnight. I’ve had people make the claim for a driver who works like 6 a.m. to 6 p.m. and sleeps in their own bed every night. It’s a little aggressive, but it’s you can make a case for it because they can’t just stop and eat lunch.

They can’t just stop and take care of things. They have to, they’re gone all day. So, but they talk about when it can be paid. They talk about things like what’s the best way to do it. And they say, can you do it in a non-daily fashion? And you can as long as it’s not more than the day than the allowance that the IRS has.

So revenue procedure 2024-68 tells you how much it is. And again, there’ll probably be a revenue procedure 2026-whatever number they’re up to. Revenue procedure 2019-48 tells us how to use it and tells us how it works. If you haven’t read these and you’re a person who’s a little skeptical that Perdium is a snake oil thing, give them a read. Skip down to in 2019-48, you’ll see special rules for the transportation industry as well, and they’ll talk all about how it works.

This isn’t me making up something. If only I was that creative. So you don’t have to guess if you read it. You you don’t have to rely on what somebody heard at a truck stop or what somebody heard on a podcast, or somebody posted on Facebook or social media. The IRS is the definitive guide on this, and they’ve already published the rules.

The IRS didn’t just give us a number, they gave us a playbook on how to use it. That’s important because the IRS will update this playbook again every couple of years, or as they deem necessary with costs. And as we all know, inflation has been going up. And per diem has reflected that, by the way. It went up significantly last time.

I think it was $69 a day and it went up to $80. So that was a big jump. That’s why I expect it to go up again this year. But too many people just rely on this is the way we’ve always done it, or this is what we heard from somebody at the truck stop or on a Facebook group. And Facebook groups are great, but they’re not always correct.

It’s like AI in a way, isn’t it? AI is great. It’s not always correct. But both are equally confident that they’re right. Get it right from the horse’s mouth, get it right from the IRS. That’s going to be the people that will, they’re the ones who are going to audit you.

So you may as well use their instruction book. The guy on Facebook’s not going to audit you. So audits are pretty rare. I’ve not seen a trucking company, I’ve been in this, I’ve been in trucking for over 25 years. I’ve never seen a trucking company get audited for per diem.

Just full stop. Now, it doesn’t mean it hasn’t happened. I clearly don’t talk to every trucking company ever. So it could happen. Especially for owner operators and things, too, it could happen.

They would do it as a meals and incidental deduction on their uh on their schedule C if they filed one that way. But the auditor walks into your business because they’re doing an audit. They’re probably not asking, do you pay per diem? Instead, they’re asking questions like how do you determine who qualifies? How do you calculate it? You know, how long was the driver gone? What records do you have to support that the driver was gone? Can drivers opt out? Is your process consistent? Which is a big thing, by the way. Consistent application of process is good. That’s that always it makes it less seem less random.

But these are documentation questions, these are not opinion questions. The auditor is going to use the same revenue procedures that we’re talking about right now. They’re not just going to invent new rules, they’re not going to do anything like that. But I and I do want to circle back to one of the questions, which is how do you document the days? What records do you have to support it? A lot of people first think logs. They’re good, but we don’t keep logs for more than six months.

Back in the paper log days, when I got into trucking, you’d have an envelope for each week, and every week you’d put a new envelope in the front and pull one out of the back and throw it away because you didn’t want to keep those logs because as much as the IRS could be a problem for you, I understand the DOT could be a problem for you. And there’s no point in leaving extra evidence. So I wouldn’t rely on logs. What I would rely on is billsylating, and I would rely on my TMS system to have that data. So you could look back and say, this driver bill was on this load that picked up in Chicago on June 15 and delivered in Miami on June 17 and then reloaded in Fort Lauderdale on June 18 and came back on the 20th.

So we’re taking those days. And you’ll have the TMS, most of the time would be enough, but the bill of lighting, if you scan in your documents and you’ve got it handy, the driver signs for it. It’s right there. And you show the driver, you show that you paid the driver for it. So that’s usually going to be good justification for you.

Because good records make good audits. They want the things you can prove. So maintain those records, those bills of lighting, if you put if you are able to put them into your TMS and upload them, which I think most of them can, you want to do that or keep them somewhere. You want to make sure that your uh TMS is backed up because if it’s all on you, if it’s all a server-based one and the server fails, what that would be a problem. You want to make sure you keep payroll records because that’s the best way to verify it.

You if you pay the driver by the mile, or if you put better yet, if you put the pay stub detail on it, it’ll say this load from Chicago to Miami on these days, it’ll be right on the pay stub. That will help you a lot. But you got to maintain records. You can’t claim ignorance, you can’t say my dog ate my homework. That’s never going to work.

The documentation is what gives the auditor confidence that you’re right. Uh, as an example for a work comp audit, we do work comp audits for our clients. And when a work comp auditor comes here, I’ve got everything laid out for them before they get here. All the math dies out, everything’s done. They’re in and out of here in 15 minutes because they don’t need to, everything makes sense.

So they don’t have to go digging for things. So that’s how it’s supposed to go. But companies get in trouble with this sometimes. And this is audits in general as well as per diem audits, which they don’t specifically do per diem audits, but if they’re examining your tax return, that’s where it’s going to come from. But IRS problems don’t come because somebody was trying to cheat all the time.

Sometimes they just either didn’t understand the rules or just were sloppy with their documentation. I’ve seen companies that round out travel days a little high. I call that being aggressive. Okay. Or they’re just guessing at the number of days.

If you can know it, it’s so much better. Or they pay every driver gets the same amount of per diem every week, no matter what. That’s not a recipe for success. Or continuing to pay a driver per diem when they don’t qualify anymore. They’re running local this week.

They don’t get per diem. Or using formulas that aren’t supported by revenue procedures. What I split by that is they talk about in that 2019-48 that you can pay per diem by the mile, but you can’t exceed the daily rate. So if you’re paying 20 cents a mile in per diem, if that driver goes more than 400 miles, you’re out of compliance in that day. And the IRS could go look at each day and they could say, okay, Chicago to Miami, you drove 550 miles one day, you paid 110 in per diem.

30 of that’s not doesn’t count as per diem. Now that’s wage to the driver, and now you owe payroll tax and you owe, and the driver owes and all these things. You’d hope the drivers, you would hope that the auditor is not that particular and not that knowledgeable in trucking, and to be fair, they don’t have a trucking audit unit. So that’s where the confidence and the documentation really helps you because you can show them that you’re more about what they’re doing than they do in a trucking company. So just keep that in mind, but just be smart about this.

I’ve also seen this too. If your driver essentially lives in the truck, I’m not talking about a driver who goes out for six weeks and then is home for two weeks and then goes out for six weeks and is home for two weeks. I know those drivers exist and I don’t know how they do it. They’re amazing. But a driver who gets seven days of per diem every week, all year.

So you have 365 days of per diem through the year. That sounds great. You’re like, that driver literally didn’t go home the whole year. Okay, that’s that may be true. However, the IRS is going to say because the driver never went home in air quotes, that they were really home every night because they lived in the truck.

So they might disallow the whole thing. And you never want that. You that would be that then you lose the whole the whole bit of per diem. 365 days times $80, $26,000, $27, $30,000, whatever it is. You don’t want that to be.

So they wouldn’t qualify at all. So you can’t just you can give them seven days in a week for sure. Driver runs, again, running out is out for six straight weeks and then home for a couple weeks. Pay them seven days for those weeks when they’re gone. Just don’t pay them when they’re home.

Make sure that they’re not a good rule of thumb to me is 300 days. Most drivers are out more than 300 days. And so after that, you want to be really careful because they’ve got to have a home established. And that home, if that home’s the truck, they do not get per diem. So once you make sure that the eligibility works out, then you can do the calculations because most of the mistakes that happen are long before the audit, and they’re usually eligibility mistakes.

So per diem isn’t just about how many days somebody worked, it’s about whether they qualified on those days. Because I hear stories from my clients and from other people that I talk to in trucking. Like, oh, my drivers are out all week, every week. Well, are they? So you want to you can’t just automatically give them seven days. So then I’ll ask a question about well, where’s the driver’s tax home? Because if they’re out seven days every week, the IRS is going to say their tax home is wherever that truck is.

Home is where the heart is? No, home is where they sleep at night. So if they’re always in the truck, you gotta be careful. So when we built our PRDM program, we didn’t start by asking how can we maximize savings to the absolute limit? We asked, what does the IRS require or what does the IRS allow? And then we built our per diem program and the software that we use around those requirements. I’d much rather explain the process to an IRS auditor than explain why we ignored revenue procedures. This per diem isn’t based on industry tradition.

It’s not just the way we’ve always done it. It’s based on revenue procedure 2019-48. And by the way, start citing revenue procedures and know them to the IRS auditor, and they’re going to give you a lot less grief because it’s so much more work for them, just as a person. And then you also say we also get the current daily rate each year, which today is found in revenue procedure 2024-68. If you got audited for 2023, then there’s a revenue procedure from 2022 or 2023 that comes in there.

Compliance is the first thing. The savings are the result of doing the pre-dium program correctly. You don’t build a per diem program around savings, you build it around compliance, and then you try and get the savings. Because we all like saving money, and trucking is really hard. It’s gotten a little bit easier in the last six months, but I should say it is a little bit less hard.

Money’s always saving money is always important, but no amount of savings is worth the audit risk. So you don’t want to start paying $30,000 a year in per diem to every one of your drivers, for example. And think, oh, I could get away with it. Or, oh, they make enough wage beside, it’s okay. As a quick side note, part of the documentation, the per diem needs to be on the W-2.

And let me explain that for a minute because I think this is important. Per diem goes in box 12. It’s those little boxes with the letters towards the bottom of the form on the right. And there’ll be a letter like your 401k would go in there, or your Roth or your those kinds of things go in there. Um but for per diem, it’s code L, which is substantiated reimbursed expenses, and then the amount.

So, because it’s not in the wage if you’re doing it this way. If a driver would have made $75,000 in rate times miles, but they had $20,000 in per diem, and I am rounding off so you get the idea. Their wage, box one and box three, and box five, if they didn’t have 401k, is going to say $55,000 and all the taxes that go with that. But then they’re going to have $20,000 in box 12 with a code of L. The IRS is going to want to see that.

If you’re not doing that, you need to do that. Even if everything else about per diem and you’re just listening to this because you want to feel validated, you got to have that in there. The IRS needs to see it. Now, the driver will not pay tax on it. We can talk about this in another episode.

The driver doesn’t pay tax on it, but it still needs to be listed, much like the companies where they put the amount of the health insurance on the W-2. The employee doesn’t pay tax on that. It’s just it’s just noted. So there’s going to be more and more things like that as we keep going, I’m sure. But again, quick end of rant, but make sure you’re using code L in box 12 for the amount of the per diem.

All right, so let’s say you get audited. Your number comes up, so to speak. You’ve all gone through DOT audits, so you should have a good idea. But let’s talk about this a little bit. First off, don’t panic.

Audits happen. It’s like I think of it as driving by the police car on the highway. If you’re doing the speed limit, the police car is no big deal. It’s when you’re doing 90 in the 70s is when it’s a problem, right? So the question wasn’t where we audited, it’s can we support the deductions we took? And we support what we’ve done. So if your documentation is organized and you follow the IRS guidance, the audit becomes just a verification.

That’s it. If your records aren’t complete, that’s when things become more stressful. Again, much like a DOT audit. If you don’t have driver files, that’s going to be a problem. If you don’t have drug tests, if you don’t have, et cetera, et cetera, that’s going to be a problem.

Confidence during an audit isn’t something you create the day the auditor shows up because they’re going to tell you they’re coming. It’s something you’ve been building for years by having proper procedures and having proper compliance. That confidence during an audit is earned years before the audit ever happens. So you have written procedures. This is how we do pre-diem.

You have consistent application of said procedures, and you keep good records. And again, if somebody wants to opt out, you let them opt out. That’s what reduces the stress. And again, the auditor’s not generally going to come in and say, we want to see your pre-diem records. Generally, that’s going to be part of a tax audit.

They’re auditing your 1120 or 1120S if you’re a corporation, and so on and so on. They’ll see it. They’ll say, we don’t know about that meal’s an incidental number. And why are you taking 80% instead of 50% like everybody else gets? Then that opens up the pre-diem conversation. And then you point them to these things, and you should be good to go.

Again, I can’t guarantee anything, and I’m not an attorney, so on and so on. But that gets you through the auditor. But they’re going to come at it as a meals. We’re auditing your meals, your meals seem too high. I don’t want trucking companies to fear per diem.

I want them to respect it and I want them to use it. Per diem is a tremendous benefit for truck drivers and the companies they work for. It can save everybody a bunch of money, but only when it’s done correctly. The IRS has already published the rules. Our job is not to invent new ones or ways to get around them.

Our job is simply to follow them and get the benefit there. The best audit strategy isn’t hoping you’ll never get audited. It’s knowing you’re ready if you do. Because when that audit letter comes, it’s already too late if you’re not ready. If today’s episode helped you better understand truck driver per diem and IRS audits, I’d appreciate it if you’d subscribe to the podcast, leave a review, and share this episode with another trucking company owner who could really benefit from it.

If you’re wondering if your current per diem program follows the IRS guidance, we’d be happy to have that conversation with you. At Superior Trucking Payroll Service, we’ve built our process around compliance first because the goal isn’t just saving money, it’s helping you do it the right way. Thanks for listening. I’ll see you next time on the Driven for Success podcast.