Reimbursement Plan

[DTS]

Is it permissible with the IRS for a company to partially reimburse salesman's expenses even though they do not have a written policy in place?

The reason I'm asking is because a client is being audited on 2106 expenses and the IRS has requested a letter from the company stating "accountable" or "nonaccountable". There is no written plan, but each week the salespeople turn in expense records and receipts for meals and entertainment and they reimbursed for those, plus they are given a set allowance towards their autos and cell phones. Looking at 463 and the determining factors, it sure appears this is accountable.

Thanks so much.

[appelman]

I'm dubious about the set allowances.

To be an accountable plan, I think the car allowance would have to be based on either expenses or mileage, and the cell phone allowance would have to be based on expenses. If not accountable, allowances would be added to wages, and the employee would have to recoup expenses on Form 2106.

[Jiggers]

A set allowance for autos is NOT an accountable plan.

An accountable plan requires substantiation for the business mileage.

A set allowance could be considered by the IRS as a way around a salary and the related payroll taxes. This amount should have been added to the W-2 with the appropriate taxes withheld.

Besides the taxpayer having a problem with this audit, the employer may receive a visit from the IRS auditing all of the salesmen's set allowances and reclassifying them as payroll. A big mess may be ahead.

[DTS]

Thanks for responding. I may have used the wrong wording, so I will contact the company today and get more detail for that and post it.

[FEDUKE404]

Hiding the income game

It has been my experience that employers who "reimburse for meals" and/or pay "a set allowance towards their autos" are frequently tossing additional taxable income at the employee.

While the employee frequently feels the boss is just paying deductible expenses ("we don't need no steenking records!") the IRS generally takes a slightly different perspective on such.

It often seems to be a bit of a cat and mouse game.

FE

[DTS]

...they're reimbursed for those, plus they are given a set allowance towards their autos and cell phones.

Additional info: Allowance amounts for auto and cell are not backed up by receipts, only meals and entertainment. What a lovely can of worms this could be!

[sandigi]

Accountable Plan does not need to be written

As long as the 3 requirements are met:

Accountable Plans (from pub 463)
To be an accountable plan, your employer's reimbursement or allowance arrangement must include all of the following rules.

1.Your expenses must have a business connection — that is, you must have paid or incurred deductible expenses while performing services as an employee of your employer.

2.You must adequately account to your employer for these expenses within a reasonable period of time.

3.You must return any excess reimbursement or allowance within a reasonable period of time.

It looks like your meal and entertainment exp ARE accountable plan.
These reimbursement $ should not be in W-2 box 1.
They will not go on Form 2106

Cell Phone: ok and can be "accountable" as long as rules 1-3 above are met.

Car allowance: This MAY be ok. Again follow rules 1-3. So if employee is accounting after the fact and the reimbursement is not more than the expense, and if it is; the excess is given back within reasonable time.
These reimbursements would not be in W-2 Box 1.
They will not go on Form 2106.

If truly an "accountable plan" then the reimbursements are not in W-2 Box 1. No Form 2106 would be filed. The employee job expense would not be subject to the 2% floor.

Form 2106 would be filed ONLY if the employer was not reimbursed up to the actual expense the employee incurred.
The excess employee business exp would then go on here.

Here is the link to the wealth of information:

http://www.irs.gov/publications/p463/ch06.html#en_US_2011_publink100034114

[sandigi]

how is employer reporting on W-2?

Have you found out how the employer is reporting it on W2?

I suppose meals and entertainment could be accountable and not in Box 1 W2.
But car and cell sound like they are non-accountable and should be in Box 1 W2

If you find out how the employer is reporting it, then you can look at the Form 2106 and see how the employee reported it! Which is really what the IRS wants to know. If not properly reported, you can amend.

[FEDUKE404]

The maze

Additional info: Allowance amounts for auto and cell are not backed up by receipts, only meals and entertainment. What a lovely can of worms this could be!

I've run into many employers who will "reimburse" employees for meals (to include breakfast/lunch/dinner) when in the vast majority of cases NONE of those meals would otherwise be a deductible business expense.

Employees squeal and I look like a bad person for asking the necessary questions as to why those meals "should" be considered deductible.

And just to clarify: I'm keeping separate any true business meetings with clients, etc. We're talking about just regularly paying "x$ per day for meals" or "y$/month for car expenses" to the employee.

FE

[JohnH]

It often seems to be a bit of a cat and mouse game.

FE

Reminds me of a story my old friend Pete used to tell. He supervised a group of managers who traveled among lending offices of a regional finance company to check on performance. This was back in the days when men wore hats. One manager turned in an expense report showing travel, meals, and other items. Under "other" he had listed his hat, which blew off in a heavy wind & landed in a creek. Pete returned the report with the comment that the company doesn't reimburse for personal clothing items, even when lost or damaged on the job. A few days later the manager turned in a report with all the figures recalculated, but which totaled the exact same amount of money as on the original report. Attached was a note which said:

"Mr Pete. Attached is my revised expense report. Now see if you can find that #@&%# hat!"

Pete told me he approved the expense report and authorized payment.

[sandigi]

I've run into many employers who will "reimburse" employees for meals (to include breakfast/lunch/dinner) when in the vast majority of cases NONE of those meals would otherwise be a deductible business expense.

Employees squeal and I look like a bad person for asking the necessary questions as to why those meals "should" be considered deductible.

And just to clarify: I'm keeping separate any true business meetings with clients, etc. We're talking about just regularly paying "x$ per day for meals" or "y$/month for car expenses" to the employee.

FE

Are they hiring?

[MAMalody]

I have always been told that the accountable reimbursement plan must be written. All you should have to do is see a copy of their written plan to see if it qualifies. Have I been wrong all this time?

[DTS]

Have you found out how the employer is reporting it on W2?

I suppose meals and entertainment could be accountable and not in Box 1 W2.
But car and cell sound like they are non-accountable and should be in Box 1 W2

If you find out how the employer is reporting it, then you can look at the Form 2106 and see how the employee reported it! Which is really what the IRS wants to know. If not properly reported, you can amend.

Reimbursement was not reported on the W-2, so this has now come into play. I liken this to a "hybrid" plan.

[DTS]

I have always been told that the accountable reimbursement plan must be written. All you should have to do is see a copy of their written plan to see if it qualifies. Have I been wrong all this time?

There is no written plan and this is one reason I posted originally.

[Kram BergGold]

So here is waht you have

The meals and entertainment are reimbursed under an ccountable plan so this is a wash and these deductions should not be claimed on the return. The mileage and cell deductions are a 2106 expense but since the employer did not include the reimbursement in the W-2 as proscribed by law you will need to add this to his income on Form 1040 line 21. Your client is going to owe money I think.