Reporting Reimbursement for Tax Prep Fees

[Unregistered]

Does anyone out there have a solid explanation to how reimbursement for tax preparation fees should be reported in the following scenario:

Employer reimburses employees that have worked in three or more states for their tax preparation fees as long as the employee uses HRB for preparation.

I've called the IRS on the subject and their suggestion confirmed my suspision that the reimbursement should be reported as Other Income although I can't seem to find anything specific in either TB or the IRS pubs to back it up.

My concern is that any income reported in the Other category over $400 seems to flag a return for further review. I guess my question is two-fold: should this be reported as "Other Income"; and is it fair to be concerned that doing so will flag the return?

Any feedback is greatly appreciated.

[Bees Knees]

TTB, page 13-25, "Author's Comment - Definition of term: As used in this publication, the term "employee fringe benefit" means any benefit provided to an employee that is in addition to money. All benefits provided to an employee, including money, are taxable, unless the law specifically excludes or defers tax on the benefit from income..."

In other words, you add it to the W-2, box 1 as taxable wages, unless there is an exclusion for the benefit. An employer paying for an employee's tax preparation services would be taxable as wages, unless there is an exclusion for the benefit.

You said the employee gets tax prep reimbursed if they have it done through HRB. Is the employee an HRB employee? If that were the case, the benefit could be excluded under Section 132(b) as a no-additional-cost service. (TTB, page 13-26)

[Unregistered]

Thanks for the quick response Bees Knees.

Not an employee of HRB.

Is it "best practice" to add the reimbursment to the Box 1 value listed on the W2 (it wasn't included in the W2 provided by employer)?

[Snaggletooth]

Basis?

A corollary to the situation described above. Claiming the reimbursement, whether on line 21 or whether added to compensation by the employer results in the taxpayer now having a "basis" in the tax prep fee.

Does this mean he can now DEDUCT this amount on Schedule A subject to the 2% reimbursement? I say yes. I would go beyond that, and even list this as an item on form 2106, although this probably means it will end up in the same place.

Since the guy is working in multiple states this has become a job required expense. Absolutely would not exist if it were not for his job. The injustice exists because an item subject to 2% rarely survives as a tax deduction.

[Bees Knees]

Its no different than an employer giving the employee a pay check, and then the employee turns around and uses that pay check to pay for tax prep fees.

Deductible on Schedule A, subject to 2% AGI limit.

[Bees Knees]

If the reimbursement was not included on a W-2, but it is taxable, I would put it on line 21 instead of adding to the W-2 wages on line 7. No need to get IRS's computers all worked up because they can't match it.

[Unregistered]

If it were an expense reimbursement on an accountable plan, wouldn't it then be considered non taxable

[Bees Knees]

Yes, but only if it is a deductible business expense. Personal tax preparation is not a deductible business expense, so the accountable plan rules cannot apply here.