IRS Provides Guidance On Expense Reimbursements

by Mike Godfrey, Tax-News.com, Washington

14 November 2006

The US Internal Revenue Service last week issued guidance emphasizing the need for employers to track the amount of expense reimbursement allowances paid to employees on a per diem basis.

Revenue Ruling 2006-56 explained to employers that if they routinely pay per diem allowances in excess of the federal per diem rates, but do not track the allowances and do not require the employees either to actually substantiate all the expenses or pay back the excess amounts, and do not include the excess amounts in the employee’s income and wages, then the entire amount of the expense allowances is subject to income tax and employment tax.

According to the IRS:

"Generally, amounts employers pay employees to reimburse them for substantiated business expenses are not subject to income tax or employment tax. For reimbursements for expenses for meals and other incidentals associated with business travel, employees get this exclusion for reimbursements for each day of travel up to the federal per diem rates without having to actually substantiate the amounts of the expenses."

"However, if an employer pays expense allowances that exceed the federal per diem rates, the excess amounts are subject to income tax and employment tax if they are not repaid to the employer, unless the employee actually substantiates all of the expenses covered by the per diem allowance."

IRS Revenue Ruling 2006-56 became effective immediately upon issuance.

However, the IRS recognized that employers may need some time to adjust their systems so they can track excess allowances and account for them correctly. The tax authority therefore issued instructions to its agents not to apply the results under the revenue ruling for taxable periods ending on or before December 31, 2006, in the absence of intentional noncompliance.

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