IRS SBSE-04-0108-003, 1/14/08
The IRS has reissued interim guidance that provides audit guidelines to its examiners reviewing excess per diem payments. The original guidance expired in November 2007.
The original guidance (IRS SBSE-04-1106-049) affected taxpayers who paid reimbursement allowances to employees for travel expenses in amounts that exceeded the federal per diem rate, without treating such excess amounts as wages for employment tax purposes. The excess payments called into question whether the employer had an accountable plan. Payments under an accountable plan are treated as nontaxable expense reimbursements. In contrast, payments under a nonaccountable plan are wages that must be reported on Forms W-2 and that are subject to employment taxes.
In November 2006, the IRS issued Rev Rul 2006-56, 2006-46 IRB 874. The ruling discussed the proper employment tax treatment of expense allowance payments where an employer routinely failed to treat amounts exceeding the federal per diem rate as wages. The ruling said that the entire reimbursement for business-travel-related meals and incidental expenses must be treated as paid under a nonaccountable plan (and, thus, as wages) if an employer doesn’t track expenses and doesn’t require employees either to actually substantiate expenses or pay back amounts in excess of the deemed substantiated amount.
Periods ending before Jan. 1, 2007. The interim guidance noted that most taxpayers who were not in compliance with Rev Rul 2006-56, 2006-46 IRB 874, after its November 2006 release needed time to update or secure accounting software that enabled them to compute the proper amount of additional wages. As a result, for taxable periods ending on or before Dec. 31, 2006, the IRS advised its examiners not to treat a plan as entirely nonaccountable solely because excess per diem payments were not treated as wages, absent egregious circumstances or evidence of intentional noncompliance. Instead, the examiner should only treat the amounts in excess of the federal per diem limit as wages.
Periods ending after Dec. 31, 2006. Effective Jan. 1, 2007, the IRS instructed its examiners to determine if the plan is abusive, based on: (1) the extent the excess payments are not treated as wages, and (2) whether a system for tracking excess payments is being utilized. If an employer utilizes a system for tracking excess payments, then the fact that the employer (due to errors in its system) routinely pays excess allowances that are not treated as wages will generally not be treated as a pattern of abuse by the examiner. If a plan evidences a pattern of abuse, all of the per diem payments made under the plan will be treated as taxable wages. The IRS notes that each case stands on its own, and a determination must be made based on the “facts and circumstances” of each particular situation.
The IRS said that the excess per diem issue most frequently arises in audits of transportation or construction businesses, but can affect other industries as well.