Recently, we have seen a few letters from the Internal Revenue Service about frivolous filings related to fuel tax credits on Form 1040 personal returns related to Schedule C businesses.  If you received one of these, identified as an IRS Letter 3176C, it’s a serious warning that your tax return or submission has been identified as “frivolous’. This article explains what that means, why you received the letter, what your options are, and the potential consequences if you do not respond.

What Is Letter 3176C?

Letter 3176C is the IRS’s official notice that your tax return or other tax-related submission contains arguments or positions the IRS considers frivolous. A frivolous position is one that has no basis in law or has been repeatedly rejected by the courts—such as claiming that wages are not taxable income, or that the federal income tax is unconstitutional.

The letter is not an assessment of a penalty, but a warning. It gives you a chance to correct your return or withdraw your submission before the IRS imposes a $5,000 penalty under Internal Revenue Code (IRC) § 6702.

Why Did I Get This Letter?

You may receive Letter 3176C if you file a tax return or make a submission (such as a request for a hearing or an offer in compromise) that includes one or more arguments the IRS has officially listed as frivolous. Unfortunately, for motorcoach companies, this includes the fuel tax credit.

What Does the Letter Say?

Letter 3176C will:

• Identify the specific frivolous position(s) in your submission
• Reference the legal authority for the $5,000 penalty (IRC § 6702)
• Explain that you have 30 days to correct your return or withdraw your submission
• Warn that if you do not respond, or if you respond with another frivolous argument, the penalty will be assessed

What Should You Do If You Receive Letter 3176C?

1. Review the letter carefully read the letter and the IRS’s explanation of what they consider frivolous in your submission.
2. Take action within 30 days. You have 30 days from the date of the letter to file a corrected, non-frivolous return or to withdraw your submission. We have found that the IRS has been granting 30-day extensions upon request.
3. Correct or withdraw your submission if you correct the issue or withdraw your submission within the deadline, the penalty will not be assessed.
4. Do not respond with more frivolous arguments If you respond with another frivolous position, the IRS will proceed to assess the penalty.

What Happens If You Ignore the Letter?

If you do not respond, or if your response is still frivolous, the IRS will assess a $5,000 penalty for each frivolous return or submission. This penalty is in addition to any other penalties or interest that may apply. The IRS must obtain written managerial approval before assessing the penalty.

What is the IRS telling us we need to do to support the fuel tax credit claim?

The IRS is requesting documentation to substantiate the claim.  Below is a list of items we have been provided.

• Reason that the claim is valid.
• Vehicle list for all vehicles for which the credit is claimed.
• Schedules or workpapers supporting the calculation.
• Copies of invoices and/or receipts for fuel purchased upon which claim was based.

This documentation may be mailed or faxed into the IRS department requesting the information.

The IRS will evaluate the documentation to determine if it substantiates the claim.

Written by Tracy Fickett, BUSBooks, LLC

Not an exciting topic, but sure enough, not all new entrants into the motorcoach industry are aware of this federal tax benefit until they have filed several tax returns. Reasons for this costly oversight may be that the operator had yet to hear of it from industry peers, has not explored all the information that is available at the association level, and their tax accountant is not aware of industry nuances when it comes to the federal tax code. It is not too late if you are one of these operators. And by the way, welcome to the industry!

Motorcoach operators are eligible for a federal diesel fuel tax credit if any part of your bus operations includes intercity or local transportation, or the transportation of students or school employees. These credits are based on the number of gallons of diesel fuel your company uses for these nontaxable uses. The rates are 17 cents or 24.3 cents per gallon of diesel, depending on what the fuel is used for. In other words, you are due at least 17 cents per gallon of diesel fuel pumped into your buses and motorcoaches. In order to file for such credits, we recommend you track your fuel cost by type (diesel gasoline). With the proper documentation, you are eligible to go back three years and file for the credits. These are credits, dollars back to you, not expense deductions. This credit is fully refundable should your business have no tax liability or can help the company pay any federal taxes due.

Eligibility rules

Note: You are not due a credit if the diesel fuel was purchased without the federal excise tax added.

A bus used for intercity or local use bus, designed for 20 passengers or more, qualify for a tax credit of 17 cents per gallon.

A school bus is defined as a bus used to transport students and employees of schools. Schools are defined as any educational institution with regular faculty, curriculum, and enrolled body of students.  Schools are not limited to kindergarten through 12^th grades. Make sure you track the student purposed miles so you can use your average MPG to determine the gallons used for student runs which qualify for a higher tax credit of 24.3 cents per gallon. This is not limited to “yellow bus” mileage.

Your company can file for this credit either quarterly or annually. If filed quarterly, use IRS Form 8849 and Schedule 1 of Form 8849 to record your information. Line 3a for School Buses defined above, Line 3d for all other. The claim must be filed during the quarter following the last quarter included in the claim and be at least $750.

If you choose to file annually or you are late filing the quarterlies, use IRS Form 4136 and file it with your annual income tax return. Line 3a for School Buses, Line 3d for all other.

Seek assistance from BUSBooks or your CPA when filing for previous year credits you may have missed. For more resources, see Publication 510 and Internal Revenue Code Section 6427.

How about tires? Are you paying the federal excise tax on tires used for intercity, local or school buses?  You do not need to! Apply for a federal excise tax exemption number from the IRS. Once received, providing that information to your tire retailer will allow you to purchase and lease those tires without paying the federal excise tax. There is no reason to pay that tax if you are exempt from it! Save over $50 on a typical bus tire, or $400 on a full set. Receive more information from your tire retailer who will be happy to assist.

Let us at BUSBooks guide you in obtaining tax benefits that are available to your company right now!

Written by Tracy Fickett, CPA and Peter Shelbo, Veteran Bus Operator

BUSBooks is a unique CPA accounting firm dedicated to the motorcoach industry.

The information contained in this communication is general in nature and is not intended, and should not be considered, as legal, accounting, or tax advice provided by BUSBooks, LLC to the reader. The reader is also notified that this material may not apply to or be suitable for the reader’s specific circumstances or needs and may require consideration of additional factors including other tax and non-tax facts and circumstances. BUSBooks, LLC recommends that the reader contact his/her tax professional before taking any action based on this information. BUSBooks, LLC assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein.