International Fuel Tax Agreement

• The IFTA was originally set up as a cooperative program for the reporting and payment of fuel use taxes and eventually recommended for national adoption by the NGA.
• IFTA is an agreement on the collection and distribution of fuel use tax revenues among member jurisdictions made up of the lower 48 United States and 10 Canadian provinces.
• There are no federal regulations that specifically apply to IFTA, but IFTA Inc. manages and administers IFTA.

The International Fuel Tax Agreement (IFTA) was originally set up in 1983 by the states of Arizona, Iowa, and Washington as a cooperative program for the reporting and payment of fuel use taxes. In 1984, federal legislation authorized the formation of a working group on motor carrier procedures to review methods used by the states in the collection of fuel taxes. Finally, in 1987, the National Governor’s Association (NGA) recommended the adoption of a fuel use agreement, now known as the IFTA.

Member jurisdictions

IFTA is an agreement among member jurisdictions — the lower 48 United States and 10 Canadian provinces — for the collection and distribution of fuel use tax revenues. IFTA allows carriers to obtain one fuel license and file quarterly tax returns with the carrier’s base jurisdiction. The carrier obtains the IFTA license, files the taxes, and makes tax payments (as applicable) all through the carrier’s base jurisdiction. The base jurisdiction then distributes the necessary fuel taxes to other jurisdictions.

Carriers traveling in non-IFTA jurisdictions (or for those carriers that do not qualify for IFTA registration) must still follow the procedures and file the returns required by those jurisdictions’ individual statutes and regulations.

Which regulations apply?

While there are no federal regulations that specifically apply to IFTA, the International Fuel Tax Association, Inc. (IFTA, Inc.), is a non-profit corporation which manages and administers IFTA.

The documents that establish the rules of IFTA are the:

• Articles of Agreement,
• Procedures Manual, and
• Audit Manual.

Heavy Vehicle Use Tax

• The HVUT applies to highway vehicles with a taxable gross weight of 55,000 pounds or more — whether used interstate or intrastate.
• Canadian and Mexican registered vehicles that operate in the United States must also pay the full tax.

The heavy vehicle use tax (HVUT) is imposed against certain heavy motor vehicles, including trucks, truck tractors, and buses, and is exacted for the use of public highways.

Which regulations apply?

The Tax on Use of Certain Highway Motor Vehicles in 26 CFR Part 41, Subpart B is the tax/regulation governing HVUT.

Who must comply?

The HVUT applies to highway vehicles with a taxable gross weight of 55,000 pounds or more — whether used interstate or intrastate. The tax is payable to the Internal Revenue Service (IRS).

The tax applies when a vehicle must be registered in a carrier’s name and when the vehicle is first used on a public roadway.

What about foreign vehicles?

Canadian and Mexican registered vehicles that operate in the United States must also pay the full tax.

Foreign carriers operating taxable vehicles into the United States must carry proof of HVUT tax payment in their vehicles and present it to U.S. Customs and Border Protection officials upon request.

What about claiming a tax suspension?

Carriers may claim a tax suspension from HVUT if they expect taxable vehicles to operate 5,000 miles or fewer (7,500 miles or fewer for agricultural vehicles) during the tax year. The HVUT must still be filed, but no tax is due on vehicles qualified for suspension. If later in the year the vehicle ends up operating more than 5,000/7,500 miles, an amendment must be filed and the entire tax is due.

Tax rate

The tax rate per vehicle varies based on the taxable gross weight of the vehicle, as follows:

Highway use – Mileage tax

• Carriers have additional tax obligations above and beyond IFTA requirements in Connecticut, Kentucky, New Mexico, New York, and Oregon.

The International Fuel Tax Agreement (IFTA) allows motor carriers to operate in nearly all jurisdictions of the U.S. and Canada with virtually no further state or province tax requirements.

However, if operating commercial vehicles in or through Connecticut, Kentucky, New Mexico, New York, or Oregon, carriers have additional tax obligations above and beyond IFTA.

Connecticut

The Connecticut highway use fee applies to eligible motor vehicles 26,000 pounds or more.

For more information, please see Connecticut’s Mileage/Highway use taxes.

Kentucky

Kentucky has what is known as a “KYU” tax and applies to all vehicles 60,000 pounds or more.

For more information, please see Kentucky’s Mileage/Highway use taxes.

New Mexico

New Mexico has a weight-distance tax for all vehicles 26,001 pounds or more.

For more information, please see New Mexico’s Mileage/Highway use taxes.

New York

New York has a highway use tax (HUT) which applies to all vehicles that are either:

• 18,000 pounds Gross Vehicle Weight, or
• Empty weight is:
  • 8,000 pounds or more for a truck, or
  • 4,000 pounds or more for a tractor.

For more information, please see New York’s Mileage/Highway use taxes.

Oregon

Oregon has a weight-mileage tax for all vehicles 26,001 pounds or more.

For more information, please see Oregon’s Mileage/Highway use taxes.

Fleet taxes in Canada

• Canada’s fuel charge filing is in addition to the IFTA filings.
• The Canadian government introduced a fuel charge as part of its Greenhouse Gas Pollution Pricing Act, which is administered by the CRA.
• The jurisdictions in which the fuel charge must be paid include Alberta, Saskatchewan, Manitoba, Ontario, Yukon, and Nunavut.

Canada fuel charge program

The Canadian government introduced a fuel charge in early 2019 as part of its Greenhouse Gas Pollution Pricing Act, which is administered by the Canada Revenue Agency (CRA).

Motor carriers providing commercial transportation or travel through the provinces of Manitoba, Ontario, Saskatchewan, or the territories of Nunavut and Yukon are required to register with the CRA and are subject to quarterly fuel charge filings. Effective January 1, 2020, the fuel charge is applicable in Alberta.

The tax applies to Canada-based road carriers as well as U.S.-based carriers that operate into the “listed provinces.” A Canada-based carrier that operates solely in a listed province is not subject to registration or the quarterly tax filings.

Canada’s fuel charge filing is in addition to the International Fuel Tax Agreement (IFTA) filings.

Key definitions

• Listed provinces: Listed provinces are the jurisdictions in which the fuel charge must be paid and includes Alberta, Saskatchewan, Manitoba, Ontario, Yukon, and Nunavut.
• Summary of requirements: Canada’s federal fuel charge program applies to a variety of entities, including road carriers that use qualifying motive fuel when operating specified commercial vehicles in the listed provinces. Qualifying motive fuel includes gasoline, light fuel oil, marketable natural gas, and propane.
  • A specified commercial vehicle is one that essentially meets the definition of a qualified vehicle under the IFTA.
• Road carrier registration: Before beginning operations in any of the listed provinces, a road carrier must register with CRA. Road carriers must use L400 and L400-2 application forms.
  • If the road carrier is not based in Canada, the carrier will need a CRA business number (BN) to put on those forms. A carrier should call (866) 453-0452 or (519) 252-4705 for assistance and specifically state that a BN is needed for the fuel charge program.
  • Registration forms are available at tinyurl.com/fuelforms.
• Filing responsibilities: The fuel charge must be filed quarterly with CRA.
  • Filing forms are available at tinyurl.com/fuelforms.

Who must comply

• IFTA-qualified vehicles are those that operate in more than one IFTA jurisdiction and that meet certain weight and axle qualifications.
• Under the IFTA agreement, every qualified motor vehicle leased to a carrier is subject to the same IFTA requirements as a qualified motor vehicle owned by that carrier.
• IFTA does not apply to recreational vehicles.

International Fuel Tax Agreement (IFTA)-qualified vehicles are those that operate in more than one IFTA jurisdiction.

A qualified vehicle is defined as:

• A vehicle with a gross weight or registered gross weight that exceeds 26,000 pounds (11,793 kilograms);
• A vehicle (power unit) that has three or more axles, regardless of its weight; or
• A combination that has a registered gross weight that exceeds 26,000 pounds (11,793 kilograms).

When counting axles, only count the axles on the power unit or truck; trailer axles are not included in the axle count.

Leased carriers

Under the IFTA agreement, every qualified motor vehicle leased to a carrier is subject to IFTA requirements to the same extent and in the same manner as a qualified motor vehicle owned by that carrier. It is possible that a lessor may be considered a licensee, in which case that individual will be issued a fuel license upon application. The lessor can only be issued a fuel license if regularly engaged in the business of leasing/renting motor vehicles without drivers for compensation to other lessees or licensees. If the motor vehicle lease is for under 30 days, the fuels use/miles or kilometers permit holder for the vehicle under lease will be liable for the fuel use tax.

For those carriers using independent contractors under long-term leases (more than 30 days), the option is given to either the lessor or lessee to designate which party will report and pay the fuel use tax. If the lessee (carrier) assumes responsibility for reporting and paying motor fuel taxes, the base jurisdiction for purposes of IFTA will be the base jurisdiction of the lessee, regardless of the jurisdiction in which the lessor has registered the vehicle.

For motor vehicle leases of 30 days or less, the fuels use/miles or kilometers permit holder for the motor vehicle under lease will be liable.

In the case of a household goods carrier using independent contractors, agents, or service representatives, under intermittent leases, the party liable for motor fuel tax is:

• The lessee (carrier) when the qualified motor vehicle is being operated under the lessee’s jurisdictional operating authority. The base jurisdiction for purposes of IFTA shall be the base jurisdiction of the lessee (carrier), regardless of the jurisdiction in which the qualified motor vehicle is registered for vehicle registration purposes by the lessor or lessee; or
• The lessor (independent contractor, agent, or service representative) when the qualified motor vehicle is being operated under the lessor’s jurisdictional operating authority. The base jurisdiction for purposes of IFTA is the base jurisdiction of the lessor, regardless of the jurisdiction in which the qualified motor vehicle is registered for vehicle registration purposes.

Exceptions

IFTA does not apply to recreational vehicles.

The IFTA jurisdictions can also exempt certain vehicles from fuel taxes within the respective jurisdictions. For example, some jurisdictions will exempt buses or farm-plated vehicles from fuel taxes. Prior to claiming a vehicle exemption in any jurisdiction, carriers should thoroughly investigate the exemption and ensure it applies to the carrier’s operation.

License and credentials

• Applications for IFTA agreement licenses may be obtained by contacting the carrier’s base jurisdiction’s IFTA commissioner.
• A vehicle is not operating under the IFTA agreement unless there is a copy of the license in the vehicle.
• Temporary decal permits and trip permits may be used while a driver or carrier is waiting for annual permanent decals or in lieu of licensing in certain situations.

Any person or carrier based in an International Fuel Tax Agreement (IFTA) member jurisdiction operating a qualified motor vehicle(s) in two or more member jurisdictions is required to license under the IFTA agreement. Applications may be obtained by contacting the base jurisdiction’s IFTA commissioner. The application requests basic information about the carrier and its operations and must be submitted with the applicable license and/or decal fees. Fees vary by jurisdiction.

The IFTA license is valid for the period of January 1 through December 31. Each IFTA license must be renewed for the next calendar year. The base jurisdiction will notify its licensees of the renewal requirements.

If the applicant meets all IFTA application requirements, the base jurisdiction will issue the IFTA license and decals. The license will contain an account number assigned by the licensee’s base jurisdiction. This account number shall be used for reporting all IFTA activity of the licensee.

Licensee requirements

The licensee is required to make legible copies of the license so that one copy is carried in each vehicle. A vehicle is not considered to be operating under the IFTA agreement unless there is a copy of the license in the vehicle. Failure to display a copy of the license may subject the vehicle operator to the purchase of a trip permit and/or a citation. If the original copy of the IFTA license is lost or destroyed, a duplicate may be obtained by submitting a written request to the office of the base jurisdiction’s IFTA commissioner. The license may be carried electronically.

Each licensee will be issued two vehicle identification decals for each qualified vehicle in their fleet. Decals must be placed on both sides of the vehicle’s cab. In the case of transporters, manufacturers, dealers, or driveaway operators, the decal does not need to be permanently affixed but may be temporarily displayed on both sides of the vehicle’s cab (passenger and driver side). Failure to display the identification decals in the required locations may subject the vehicle operator to the purchase of a trip permit and a citation.

Temporary decal permits

IFTA allows temporary decal permits to be issued by the base jurisdiction or its agent. Temporary decal permits may be carried in a qualified vehicle in lieu of displaying the permanent annual decals. A temporary decal permit is only valid for 30 days to give the carrier adequate time to affix the annual permanent decals. Temporary decals are vehicle-specific and show an expiration date. Jurisdictions may charge fees for temporary decal permits and will usually only issue the permits to carriers with IFTA accounts in good standing.

While operating under a temporary decal permit, all mileage and fuel must be tracked for purposes of the IFTA return.

Trip permits

IFTA allows carriers with qualified vehicles entering IFTA member jurisdictions to obtain trip permits in lieu of licensing under IFTA. Trip permits carry a fee and are valid for a time specified by the jurisdiction.

Recordkeeping requirements: Distance records

• IFTA requires carriers to maintain milage records for each jurisdiction in operational source documents known as IVMRs.
• IVMRs can be created using a paper form or may be created using an ELD or GPS, and each has its own requirements.
• Carriers must ensure appropriate and detailed records are kept to substantiate an exemption claim.

Recordkeeping requirements under the International Fuel Tax Agreement (IFTA) can be quite exhaustive, but they are the heart of compliance, so it’s important to keep records organized and accessible in case of an audit. Carriers must keep records in two categories: distance records and fuel receipts.

Distance records

IFTA requires carriers to maintain records verifying the miles accrued by a vehicle in each jurisdiction. The operational source documents are known as Individual Vehicle Mileage Records (IVMRs).

IVMRs can be created using a paper form or may be created using an electronic logging device (ELD) or global positioning system (GPS).

Paper tracking

If an IVMR is captured on paper, it must include:

1. The beginning and ending dates of the trip to which the records pertain;
2. Trip origin and destination;
3. Route of travel;
4. Beginning and ending reading from the odometer, hubometer, engine control module (EMC), or similar device for the trip;
5. Total trip miles or kilometers;
6. Miles/kilometers by jurisdiction; and
7. Unit number or vehicle identification number.

Electronic tracking

Most carriers are now keeping their mileage data electronically through an ELD. Here’s what’s required:

When the vehicle’s engine is on, the vehicle-tracking system that utilizes latitudes and longitudes must create and maintain a record at a minimum of:

• Every 15 minutes for IRP, and
• Every 10 minutes for IFTA.

Records must contain the following elements:

1. Vehicle identification number or vehicle unit number,
2. Date and time of each system reading,
3. Latitude and longitude to include a minimum of 4 decimal places (0.0001) of each system reading, and
4. Odometer reading from the ECM of each system reading. If no ECM odometer is available, a beginning and ending dashboard odometer or hubometer for the trip is acceptable.

The data must be accessible in an electronic spreadsheet format such as XLS, XLSX, CSV, or Delimited text file.

Toll miles

Toll receipts are important documents to retain when carriers are claiming credits for toll miles/kilometers. Massachusetts is the only jurisdiction that grants credit for toll miles/kilometers. Massachusetts allows the toll miles/kilometers to be excluded from IFTA, but the licensee must still pay sales and use tax on the fuel to Massachusetts via a separate business tax return.

Many also believe that credit can be taken for toll miles/kilometers in New York. This is not the case; in New York, toll miles/kilometers can be deducted from the New York Highway Use Tax return, but not the IFTA return. The remainder of jurisdictions with toll roads require fuel taxes to be paid for all taxable distance traveled.

Temporary permit miles

Under IFTA, distances traveled while operating under a temporary decal permit are reported. The carrier reports total distance traveled, which is also reported as part of the total distance traveled in the applicable jurisdiction.

Distance exemptions

Some jurisdictions may exempt certain types of distance from IFTA tax. For example, in select jurisdictions, distance accumulated while qualified vehicles are operating off-highway or on agricultural roads are exempt from IFTA tax. Prior to claiming an exemption for distance accumulated in a jurisdiction, carriers should be familiar with the exemption, ensure the exemption applies to the carrier’s operation, and ensure appropriate and detailed records are kept to substantiate the exemption claim. In an audit, carriers would be expected to provide detailed records showing taxable distance and non-taxable distance.

While some distance may be exempt/non-taxable, the distance must still be tracked and reported in the total miles.

Recordkeeping requirements: Fuel records

• IFTA licensees are required to maintain complete records of all motor fuel purchased, received, or used in the conduct of their business in case of an audit.
• To claim tax-paid fuel credit on the IFTA return, IFTA licensees must retain certain documents that contain specific information.
• If fuel is used in non-IFTA vehicles, it cannot be claimed as tax-paid fuel on the IFTA return.

Fuel records

International Fuel Tax Agreement (IFTA) licensees are required to maintain complete records of all motor fuel purchased, received, or used in the conduct of their business. On request, licensees are also required to produce these records for audit. The records must be adequate for the auditor to verify the total amount of fuel, by type, placed into the licensee’s qualified motor vehicles.

Retail fuel purchases and bulk fuel purchases must be accounted for separately.

In general, jurisdictions will not accept any fuel record that has been altered, indicates erasures, or is illegible for tax-paid credit unless the licensee can demonstrate that the record is valid.

Tax-paid retail fuel purchases

In order to claim tax-paid fuel credit on the IFTA return, IFTA licensees must retain:

• A receipt, invoice, or transaction listing from the seller;
• A credit card receipt;
• A transaction listing generated by a third party; or
• An electronic or digital record of an original receipt or invoice.

For tax-paid credit, a valid retail receipt, invoice, or transaction listing must contain:

Date of the fuel purchase;

Name and address of the seller of the fuel (a vendor code, properly identified, is acceptable for this purpose);

• Quantity of fuel purchased;
• Type of fuel purchased;
• Price of the fuel per gallon or per liter, or the total price of the fuel purchased;
• Identification of the qualified motor vehicle into which the fuel was placed; and
• Name of the purchaser of the fuel.

Bulk fuel

IFTA licensees must retain the following records for its bulk storage facilities:

• Receipts for all deliveries,
• Quarterly inventory reconciliations for each tank,
• The capacity of each tank, and
• Bulk withdrawal records for every bulk tank at each location.

In order to obtain tax-paid fuel credit on the IFTA return, IFTA licensees that maintain bulk storage must keep records that show that:

• The purchase price of the fuel delivered into the bulk storage includes tax paid to the member jurisdiction where the bulk storage is located, or
• The licensee has paid fuel tax to the member jurisdiction where the bulk storage is located.

IFTA licensees must keep the following records that contain the following elements for each withdrawal from its bulk storage facilities:

Location of the bulk storage from which the withdrawal was made,

• Date of withdrawal,
• Quantity of fuel withdrawn,
• Type of fuel withdrawn, and
• Identification of the vehicle or equipment into which the fuel was placed.

The recordkeeping and tank reconciliation is required for both IFTA recordkeeping purposes and the carrier’s protection. Consistently monitoring tank levels and performing tank reconciliations can help the carrier ensure that fuel is not being stolen from the tank.

Carriers may have other smaller non-IFTA vehicles that use fuel from the on-site bulk fuel tanks, such as pickup trucks or non-highway equipment. If this is the case, the carrier must be sure that withdrawal records clearly distinguish between qualified and non-qualified motor vehicles. If fuel is used in non-IFTA vehicles, it cannot be claimed as tax-paid fuel on the IFTA return.

Recordkeeping requirements: IFTA Decals and Reports

• The IFTA requires carriers to account for all issued decals to avoid penalties and fraud accusations.
• A decal inventory sheet should be used to keep track of carrier decal information.
• Although monthly and quarterly summaries are no longer required by the IFTA, carriers must still compile regular reports in case of an audit.

IFTA decals

The International Fuel Tax Agreement (IFTA) requires carriers to display two IFTA decals per qualified vehicle. In an audit, carriers may be required to account for the decals that have been issued to the company. Jurisdictions want to ensure that the decals are being used legally and appropriately.

Why decal count matters

In an audit, carriers need a way to account for the decals that have been lost or need replacing. Carriers may also need to account for decals that haven’t yet been used. Carriers who cannot account for the decals that have been issued to the company may face penalties and/or assessments.

How to keep track

To help keep track of company decals, carriers can create a decal inventory sheet. This is a simple sheet — paper or electronic — that includes:

• The IFTA license year,
• The vehicle identification information,
• The serial numbers of the IFTA decals on the vehicle, and
• A comments section to enter notes about the vehicle and its decals.

For example, if a vehicle lost one of its decals, the carrier could document that the vehicle was issued a new decal. Or, if a vehicle was sold or in a collision, the carrier could document these types of situations on an inventory sheet, along with information on the replacement decals placed on the vehicle.

Reports

Monthly, quarterly, and yearly recaps or reports are prepared from the Individual Vehicle Mileage Record (IVMR) information. Computer summaries are not acceptable at face value and must always be supported by IVMRs, appropriate electronic logging device (ELD)/global positioning system (GPS) data, and the appropriate fuel documents during an audit.

The IFTA changed in July 2016 to no longer require monthly and quarterly summaries. This information must still be compiled, however, if the jurisdiction requests the summaries for an efficient audit of the carrier’s records. While summaries may not be specifically required, it is strongly encouraged that carriers continue to create such summaries as part of the carriers’ IFTA internal controls.

Recordkeeping requirements: Quarterly filing

• A quarterly fuel tax report and all owed fuel taxes must be filed and paid to a licensee’s base jurisdiction.
• Licensees whose operations total less than 5,000 miles/8,000 kilometers in all member jurisdictions other than the base jurisdiction may request to report on an annual basis.
• Reports and taxes not filed and paid by the due date are considered late/delinquent.

Licensees are required to file a quarterly fuel tax report with the base jurisdiction and pay all taxes due to all member jurisdictions with one payment to the base jurisdiction.

A base jurisdiction may authorize a licensee to submit a computer-generated tax report in lieu of the standard tax report if the report includes all required information and is in a form which can be processed by the base jurisdiction. Every licensee must submit a tax report even if there were no taxable operations for the period. Many jurisdictions now require online fuel tax filing, and carriers should check with their base jurisdiction for more details.

Tax reports are filed on a quarterly basis. The reporting quarters and due dates are:

Licensees whose operations total less than 5,000 miles or 8,000 kilometers in all member jurisdictions other than the base jurisdiction may request to report on an annual basis. This will be based upon filing history. The licensee must petition the base jurisdiction to report annually. If the base jurisdiction approves the request, it will notify the other member jurisdictions of the annual reporting frequency. If any member jurisdiction objects to the annual reporting, the licensee’s request shall be denied.

Timely filing

To avoid penalty for late filing, the tax report must be postmarked no later than midnight on the last day of the month following the close of the reporting period. If the last day of the month falls on a Saturday, Sunday, or legal holiday, the next business day is considered the final filing date.

Reports are considered filed and received:

• On the date shown by the U.S. Postal Service, Canada Post, or Delivery Service cancellation mark stamped on the envelope containing the report, properly addressed to the designated department of the base jurisdiction; or
• On the date it was mailed if proof satisfactory to the base jurisdiction is available to establish the date it was mailed.

Many jurisdictions now require online filing.

Reports not filed by the due date are considered late and any taxes due considered delinquent. The base jurisdiction may assess the licensee a penalty of $50 or 10 percent of delinquent taxes, whichever is greater, for failure to file a report, for filing a late report, or for underpayment of taxes due, which shall be retained by the base jurisdiction.

Recordkeeping requirements: Retention

• Required records must be retained for a period of four years from the date of filing the tax report or the return due date, whichever is later.
• If a carrier has extra decals, the extras must be kept with IFTA records and retained for four years, as well.

Required records, such as the individual vehicle mileage reports, fuel receipts, and quarterly tax returns, must be retained for a period of four years from the date of filing the tax report or the return due date, whichever is later, plus any time period included as a result of waivers or jeopardy assessments. Non-compliance with any recordkeeping requirement may result in having the license revoked.

Failure to provide records requested for the purpose of audit extends the statute of limitations until the records are provided.

Most vehicle tracking systems, such as a global positioning system (GPS) or an electronic logging device (ELD), will capture the required information and provide adequate records in the event of an audit. However, if a carrier has an ELD provider that also captures data for the International Fuel Tax Agreement (IFTA), the carrier must make sure the provider retains the right types of records and keeps them long enough to satisfy recordkeeping requirements. Carriers must also make sure the records are accessible in case of an audit.

Recordkeeping for decals, too?

If a carrier has extra decals, the extras must be kept with IFTA records and retained for four years — just like IFTA mileage data and fuel receipts. A carrier can list unassigned decals on a decal inventory sheet and update the sheet if the decals are ever assigned to a vehicle.

If audited, the inventory sheet would help demonstrate that the company keeps good records and goes above the minimum requirements. It would also be a backup in an audit to help account for all existing decals, especially if the decals fell off or if the vehicle was sold or destroyed.

Audits

• Jurisdictions are mandated to annually audit three percent of the carriers registered under IFTA within the jurisdiction to ensure compliance.
• Some of the most common reasons carriers are selected for an audit include delinquent/late filings, frequent amended returns, questionable MPG/KPL rates, and closed accounts.

To ensure that carriers with International Fuel Tax Agreement (IFTA) accounts comply with requirements, the jurisdictions will conduct audits of carriers within their jurisdictions. When conducting an IFTA audit, the auditor is essentially auditing on behalf of all other IFTA jurisdictions, not just the carrier’s base jurisdiction.

A jurisdiction will notify the carrier ahead of time regarding the audit and will communicate to the carrier what the audit will cover.

Jurisdictions are mandated to audit three percent of the carriers registered under IFTA within the jurisdiction annually, but this isn’t always a random selection. Usually, there are reasons why a carrier is picked. Some of the most common reasons carriers are selected for an audit include:

• Delinquent or late filings. Late or delinquent IFTA filings can be taken as a sign that the carrier has a disregard for the requirements, including the requirement to maintain records. If a carrier consistently files late, auditors may want to visit the carrier and ensure that it is keeping necessary records.
• Amended returns. Amended returns are usually filed to make corrections to the IFTA tax returns. The occasional amended return likely wouldn’t be an issue; however, if quarter after quarter the carrier needs to file amended returns, this can indicate that there may be flaws/errors in the carrier’s recordkeeping system or weaknesses in the data entry or trip/fuel data collection processes.
• High/low miles per gallon (MPG)/kilometers per liter (KPL). The jurisdictions may look at a carrier’s International Registration Plan (IRP) registrations and see that it has, for example, registered all 80,000-pound vehicles. Then, the jurisdictions may compare the IRP registration to the IFTA reported MPG/KPL and question the carrier on noticeable improbabilities in milage based on those registered vehicles. The jurisdictions may also compare IFTA reported distances to IRP reported distances and see if they are inconsistent with each other and to determine the validity of the inconsistency.
• Closing IFTA account. Some jurisdictions will perform audits on all carriers that close their IFTA account. Just because an account is closed does not mean that a carrier is no longer subject to an audit.

Best practices: Evaluations, common mistakes, and vehicle knowledge

• Following these best practices can help carriers ensure their recordkeeping obligations are met.
• Improving internal controls by implementing a system of checks and balances can improve auditor evaluations.
• Avoiding common mistakes and understanding vehicle types are two methods that can help ensure proper and compliant recordkeeping.

The International Fuel Tax Agreement (IFTA) and International Registration Plan (IRP) recordkeeping requirements seem straightforward, yet there are always questions and concerns because each carrier’s operation is different. A few general best practices can be followed to help carriers ensure their recordkeeping obligations are met.

Perform an internal controls evaluation

A big part of the audit process involves an evaluation of the carrier’s “internal controls.” Internal controls are the collective systems the carrier has in place to ensure accurate recordkeeping and IFTA/IRP filings.

Internal controls, or lack thereof, can give the auditor an idea if the carrier’s recordkeeping system as a whole is reliable and trustworthy. To evaluate the internal controls, the auditor may ask for a walk-through of the recordkeeping process from start to finish. The auditor may also interview personnel involved in the filing and recordkeeping processes. Auditors also use questionnaires to evaluate carriers’ processes.

Improving internal controls could include implementing a system of checks and balances, including:

• Reviewing the miles per gallon (MPG)/kilometers per liter (KPL) to make sure it is within a reasonable limit for the vehicle;
• Ensuring the ending odometer reading for the month matches the beginning reading for the next month;
• Investigating units with no activity;
• Looking at the cities on the Individual Vehicle Mileage Records (IVMRs) and checking the route for distance accuracy; and
• Reviewing the IVMRs for jurisdictions that should not be listed based on the route (for example, “CA” being mistaken for “GA”).

Common mistakes

Common mistakes include:

• Missing or gap miles. This may occur if there is no record of where a vehicle was during a specific time frame. This could happen if the end-of-day and next-day numbers do not match. The driver may have mistakenly thought personal miles/kilometers do not have to be recorded, or the vehicle may have been leased out and the leasing miles/kilometers were not documented. All movement must be recorded, including distance driven by mechanics and loaded, empty, deadhead, and/or bobtail distances.
• Missing or illegible fuel receipts. Photocopies are allowed, but not always encouraged by the jurisdictions. For fuel receipts that are hard to read, carriers should make a photocopy or take a photo of the receipt and save it in an image file.
• Missing information on the driver trip report. If an auditor finds an incomplete driver trip report, the jurisdiction has the authority to ask the carrier to pull secondary documents to substantiate the tax claims. This could open a motor carrier up to more scrutiny and potential liability than it wishes.

Some of these mistakes can be avoided if the carrier has solid internal controls.

Understanding vehicle types

Knowing a fleet’s vehicles means that the carrier is familiar with the types vehicles it has, where they typically operate, and the vehicles’ average MPG/KPL. This per-vehicle information can be tracked using the monthly and quarterly summaries.

Keeping a vehicle listing can also help the carrier keep track of the IRP plates and IFTA decals.

Best practices: Accounts and policies

• It is a best practice to consolidate multiple IFTA/IRP accounts to minimize audit risks and to realize jurisdiction benefits.
• Carriers should ensure that their recordkeeping policies clearly outline what is expected of all parties responsible for IFTA/IRP recordkeeping.

By following some general best practices dealing with the International Fuel Tax Agreement (IFTA) accounts and with company policies, carriers can better ensure compliance when conducting regular business and when faced with an audit.

Minimize IFTA accounts

Some carriers may have IFTA and International Registration Plan (IRP) accounts in multiple jurisdictions. While not exactly prohibited, having multiple open accounts does increase the carrier’s chances of being audited. Jurisdictions are mandated to audit at least three percent of their carriers under IFTA/IRP, so being a part of the audit pool in multiple jurisdictions increases the chances of being selected. Furthermore, one of the major benefits of IFTA/IRP is that carriers only have to work with one jurisdiction (their base jurisdiction) to pay fuel tax and registration. Having IFTA/IRP accounts in multiple jurisdictions directly conflicts with this benefit.

Carriers with multiple IFTA/IRP accounts should consider consolidating accounts, if possible, to help minimize audit risk.

Create company policies

Carriers should ensure that their recordkeeping policies clearly outline what is expected of all parties responsible for IFTA/IRP recordkeeping. Specifically, the policy should include the following at a minimum:

• An outline of driver responsibilities, including consequences for failing to follow the recordkeeping policy or circumventing distance tracking procedures;
• Copies of forms used for recordkeeping and, if applicable, instructions on using automatic recording devices, hub odometers, or global positioning units to track distance;
• Dispatcher recordkeeping responsibilities;
• Administrative data entry processes and timelines;
• Record checking/reconciliation procedures;
• Filing and record retention expectations; and
• Record purging schedule(s).

Because drivers are out on the road and essential to accurate recordkeeping, it’s important to ensure they’re properly trained on their responsibilities. Informal training sessions that stress how the carrier uses records and the importance of accurate records can help ensure drivers capture the required information. During the training sessions, it’s recommended to:

• Show drivers examples of properly completed trip reports and poorly completed trip reports;
• Present drivers with laminated copies of properly completed trip reports — drivers can use these as an on-the-road reference as to how their trip report should look; and
• Instruct drivers on the use of electronic logging devices (ELDs) or global positioning systems (GPSs) to track distances, if applicable.

If drivers are expected to use an ELD or GPS unit to track distances, the carrier should ensure that drivers know how to operate the system. Drivers should also be instructed on how to keep paper Individual Vehicle Mileage Records (IVMRs) in the event that the ELD or GPS unit fails.

Pre-audit

• A pre-audit questionnaire will ask a carrier general questions about the operation, recordkeeping, trip reports, and more to better understand how the audit should be conducted.
• During a pre-audit conference, the auditor may ask about the questionnaire to get clarification on certain answers.
• Auditors may look at an operation and try to pick sample time periods that are most consistent with the carrier’s regular operation.

Pre-audit questionnaire

After a carrier is selected for audit, the audit process starts when the carrier is notified by mail or phone call. After a tentative date and time are established for the audit, many jurisdictions will send the carrier an audit questionnaire.

This questionnaire will ask the carrier general questions about:

• The operation,
• How records are kept,
• How driver trip reports are processed,
• Whether electronic logging devices (ELDs) or global positioning systems (GPSs) are used to track distances,
• Whether the carrier uses bulk fuel,
• Whether the carrier has policies or procedures regarding International Fuel Tax Agreement (IFTA) recordkeeping, and
• Any other needed questions.

The audit questionnaire may also ask if there have been recent changes to the carrier’s business that may have affected IFTA recordkeeping. For example, perhaps the carrier recently started using ELDs to help with IFTA recordkeeping; the auditor may avoid looking at the quarter in which the new recordkeeping process was implemented, as this time period may not be 100 percent representative of the carrier’s day-to-day operations.

Pre-audit conference

A pre-audit conference is held with people involved in IFTA/ International Registration Plan (IRP) recordkeeping. The number and types of people involved will likely depend on the size of the carrier’s operation. If the carrier is a small carrier, it’s possible only one person will be involved, but for a larger carrier, there may be a few executive-level people involved. During the conference, the auditor will ask questions to better understand the operation and how records are kept. The auditor will also likely cover the pre-audit questionnaire and ask for clarification regarding some of the answers from that questionnaire.

Sample selection

The sample selection process can vary a bit. Auditors may look at the operation and try to pick a sample quarter and sample year that is most consistent with the carrier’s regular operation. The auditor will likely ask the carrier for input on which quarters/years would be best and may avoid sampling times of the year when a new system was installed or during a light season of operation. These steps are taken by the auditor to determine which audit sample would be most representative of the carrier’s regular operation.

The audit

• An audit may take a few weeks to complete as the auditor evaluates internal controls, conducts interviews, and assesses reports, receipts, and summaries for accuracy and reliability.
• A post-audit conference meeting is held after the assessment to review the audit findings and the audit report.

For the actual audit, the full assessment may take a few weeks for the auditor to complete. The auditor may also provide the carrier with an opportunity to provide additional data, if data is missing. It’s very important for the carrier to remain engaged with the auditor during the audit. If the auditor calls, the carrier should return the phone call promptly.

Part of the audit involves an evaluation of the carrier’s “internal controls.” Internal controls are the collective systems the carrier has in place to ensure accurate recordkeeping and International Fuel Tax Agreement (IFTA)/International Registration Plan (IRP) filings. Internal controls, or lack thereof, can give the auditor an idea if the carrier’s recordkeeping system as a whole is reliable and trustworthy. To evaluate the internal controls, the auditor may ask for a walk-through of the recordkeeping process from start to finish. The auditor may also interview personnel involved in the filing and recordkeeping processes.

This is the time of the audit process where the auditor will go through actual trip reports, run trips, and look for gaps in odometer readings. They’ll look at monthly/quarterly summaries, fuel receipts, fuel reports, and bulk fuel records.

When records are incomplete, or are judged to be unreliable by the auditor, the audit will require more time. The audit conclusions may be based upon other criteria, such as estimates, past experience, similar operations, or other information.

Post audit conference

A post-audit conference is held after the auditor has completed the audit and determined the results of the findings. The post-audit conference is often held with the same people who were present for the pre-audit conference. This is a meeting in which the auditor will go over the audit findings and the audit report.

The audit report is:

• A summary of the carrier’s operation;
• A summary of what was covered at the pre-audit conference;
• A narrative about the carrier’s internal controls (how the carrier manages the data and reporting process);
• An explanation of how the auditor picked a sample;
• An explanation of how the auditor analyzed fuel and what types of fuel records the carrier had available (retail receipts, bulk fuel, other fuel arrangements);
• An explanation of how the data was analyzed, and, finally;
• The audit assessment.

Assessments

• If a licensee does not file a tax report when due, the licensee will be served with an assessment from the base jurisdiction on behalf of all the other jurisdictions.
• It is the responsibility of the base jurisdiction to collect tax, penalty, and interest owed to all member jurisdictions resulting from an audit or assessment.

In the event that any licensee fails, neglects, or refuses to file a tax report when due, the base jurisdiction estimates the tax liability of the licensee for each jurisdiction owed and serves the assessment upon the licensee.

The assessment made by a base jurisdiction that follows procedural guidelines is assumed to be correct. In any case where the validity of the assessment is challenged, it is the responsibility of the licensee to prove with evidence that the assessment is incorrect.

If the base jurisdiction determines that the records produced by the licensee for audit do not appropriately meet the necessary criterion, or if a licensee produces no records after a written demand from the base jurisdiction, the base jurisdiction may impose an additional assessment by either:

• Adjusting the licensee’s reported fleet miles per gallon (MPG) to 4.00 or 1.70 kilometers per liter (KPL); or
• Reducing the licensee’s reported MPG or KPL by 20 percent.

An auditor may also issue an assessment if the carrier is unable to produce unused International Fuel Tax Agreement (IFTA) decals from previous years. Inability to produce IFTA decals from past years can result in an assessment anywhere from $200 - $30,000. Some jurisdictions may assess a flat fee per missing decal while others may estimate operations under the “missing” decals. This is not an issue in all jurisdictions, though, since some jurisdictions only issue enough decals to cover the current number of vehicles in a carrier’s fleet. In these jurisdictions, it’s not possible to obtain extra decals. In other jurisdictions, extra decals may be issued at the beginning of the year in case the carrier plans to add a vehicle to the fleet later in the year. Those extra decals, if not used, must be kept in a secure location as part of the IFTA records.

Collection of tax, penalties, and interest

The collection of tax, penalty, and interest owed to all member jurisdictions resulting from an audit or assessment is the responsibility of the base jurisdiction. Methods of collection will be governed by the laws of the base jurisdiction and the administrative procedures established by the agreement.

Appeal procedure

Assessments made for taxes due in any jurisdiction may be appealed to the base jurisdiction.

Form 2290 Filing: Annual

• Carriers must file Form 2290 and Schedule 1 if a taxable highway motor vehicle is registered under any state or District of Columbia, Canadian, or Mexican law at the time of its first use.
• Returns must be filed by the last day of the month following the month of the vehicle’s first taxable use in the tax period.
• All carriers are encouraged to file electronically using an e-file program.

Carriers must file Form 2290 and Schedule 1 if a taxable highway motor vehicle is registered, or required to be registered, by the carrier under any state or District of Columbia, Canadian, or Mexican law at the time of its first use. The entity registering may be an individual, corporation, partnership, or any other type of organization (including nonprofit charitable, educational, etc.).

Schedule 1 of the Form 2290 is used to list all reportable vehicles by category and vehicle identification number (VIN).

Annual filing

The tax period begins on July 1 and ends the following June 30, and taxpayers pay the full year’s tax on all vehicles in use during the month of July. The tax balance due shown on the form must be paid in full when filing Form 2290.

Returns must be filed by the last day of the month following the month of the vehicle’s first taxable use in the tax period, even if filing the return just to suspend the tax for any vehicle. Typically, the annual filing due date is August 31.

Electronic filing

Carriers filing a return for 25 or more vehicles are required to file electronically using an e-file program. However, any carrier can — and is encouraged by the Internal Revenue Service (IRS) — to file electronically. The benefit to e-filing is that the stamped Schedule 1 can be available within minutes of the IRS accepting the return.

The paid receipt is important because the stamped Schedule 1 becomes proof of tax payment for the vehicles listed. This proof of payment is required before vehicles can be registered with a state’s motor vehicle office.

Form 2290 Filing: Mid-year

When changes occur within an operation, carriers may be required to file an additional or amended return mid-year.

Common reasons a carrier may file more than once a year may include adding vehicles, dealing with vehicles that no longer qualify, increasing vehicle weight, or a VIN correction.

More often than not, the heavy vehicle use tax (HVUT) return will be filed once per year, but when changes occur within the operation, carriers may be required to file an additional or amended return.

Mid-year filing

Sometimes operations may necessitate filing an additional or amended return. Outlined below are some of the more common reasons a carrier may need to file the HVUT Form 2290 more than once per year:

• Adding vehicles:
  • As a general rule, Form 2290 must be submitted by the end of the month following the month the vehicle was first operated on a public highway. So, if a taxable vehicle — which wasn’t reported on the annual filing — is placed into service during the reporting period, an additional Form 2290 and Schedule 1 must be filed and the taxes must be paid.
  • For example, if a carrier purchases a taxable vehicle and then registers and uses it on a public roadway for the first time in December, a Form 2290 and Schedule 1 must be filed and the tax must be paid to account for the HVUT before January 31. Partial-year filings are paid as a prorated tax.
• Suspended vehicles no longer qualify:
  • The HVUT can be suspended for a tax period for any vehicle that is scheduled to travel 5,000 miles or less during the tax year (7,500 miles for agricultural vehicles). However, if the vehicle ends up operating more than 5,000/7,500 miles during the tax year, an amendment to the original filing must be filed and the tax must be paid on that vehicle for the entire year.
• Increasing vehicle weight:
  • If the taxable gross weight on a vehicle during the reporting year is increased, the carrier must submit an amended return. When filing, the new weight for any vehicles that have had an increase must be listed and the difference in tax owed must be submitted for the new vehicle weight.
• VIN correction:
  • Mistakes and number transpositions do happen. If a carrier finds that an error was made when listing a vehicle identification number (VIN), the correct number should be listed on an amended return. No additional tax is due at this point, but an explanation should be attached to the return regarding the correction.

Recordkeeping requirements

Taxpayers must keep records for all taxable highway vehicles registered for at least three years after the date the tax is due or paid, whichever is later.

Failing to file and pay the HVUT by the due date can result in penalties, but an extension may be requested in writing before the date is missed.

Taxpayers must keep records for all taxable highway vehicles registered for at least three years after the date the tax is due or paid, whichever is later.

Taxpayers must keep copies of all filed returns and schedules, even if a vehicle is registered in the taxpayer’s name for only a portion of a period.

Records should include the following:

• A detailed description of the vehicle, including the vehicle identification number (VIN);
• The weight of loads carried by the vehicle as required by any state in which the vehicle is registered or required to be registered;
• The date the vehicle was acquired and the name and address of the person from whom it was acquired;
• The first month of each period in which a taxable use occurred and any prior month in which the vehicle was used while registered in the taxpayer’s name (with proof that the prior use wasn’t a taxable use);
• The date the vehicle was sold or transferred and the name and address of the purchaser or transferee (if not sold, records showing how/when the vehicle was disposed of); and
• If the tax is suspended for a vehicle, a record of actual highway mileage; for an agricultural vehicle, carriers must also keep accurate records of the number of miles it is driven on a farm.

Penalties

Failing to file and pay the heavy vehicle use tax (HVUT) by the due date can result in penalties. The late penalties are 4.5 percent of the tax due, assessed on a monthly basis up to five months. Taxpayers making late payments also face an additional penalty of 0.5 percent of the tax due, along with additional interest of 0.54 percent accruing monthly.

Outside of Internal Revenue Service (IRS) monetary penalties, states will not register vehicles without proof of tax payment.

Can an extension be granted?

In circumstances where the carrier knows it won’t be able to submit the Form 2290 by the deadline, an extension may be requested. The carrier must, however, make the request for more time in writing before the due date of the return. Requests must be submitted to:

• Internal Revenue Service
• 7940 Kentucky Drive
• Florence, KY 41042-2915

In the request letter, the carrier must fully explain the cause of the delay. The extension may be for no more than six months.

Note: An extension of time to file doesn’t extend the time to pay the tax. If the carrier wants an extension of time to pay, it must be requested separately.