Unfair Audit Results - Unreimb Employee Exps

[MariaMc]

I just received a correspondence audit report done by mail from the IRS. My client had deducted a large amount of unreimbursed employees exps since she was on temporary assignments out of state as a project manager among other business exps such as home ofc and continuing education, computer supplies, etc. Because of her busy schedule and employer budgets, she did not submit most of her exps for reimbursement.

The auditor reviewed all our documentation and determined that since the employer had a reimbusement policy in place, the employee should have submitted all her exps for reimbursement and therefore is not eligible to take the deductions on the 2106. I have never heard of this before and can not find this rule in the IRS publication regarding 2106 exps.

The auditor would not review this any further with me. She said that the audit was closed out and I could request that the case be reviewed again. I feel like I'm at her mercy and the taxpayer is being taken advantage of. These exps were necessary for her to do her job and to keep up her skills.

The taxpayer also had approx $12,000 in investment advisory fees on her brokerage acct that were completely disregarded as well. We did not have complete documentation for all pmts but I find it hard to believe that they can make a blanket determination and disallow everything. Where is my leverage?

Any comments?

[joanmcq]

Well, the auditor is right, that if she could have been reimbursed, no deduction is allowed. She is SOL. As far as the investment fees, you can ask for reconsideration of those if you have documentation.

[Snaggletooth]

Welcome

Welcome Maria Mc. Hope you will visit the board often.

From your discourse, I agree that your auditor is not concerned about being fair, in that no further information to reflect on the situation is being considered. However, there is a strong point when maintaining the taxpayer did not seek reimbursement from the employer if there was a reimbursement plan in place.

Maria, I believe there is a conflict in the plot somewhere. If there was this reimbursement plan in place, then why did your client not submit expense reports? Especially if the expenses were substantial, like several thousand dollars. Would not a tax-free reimbursement be much better than a Form 2106 deduction? Is it because the expenses are not bona fide? And equally important, is it because the expenses were not required? If either is true, your clients' argument is a dead duck.

In light of the above your question might be "Where do we go from here?" The obvious answer is to find out what would happen if these expenses were submitted to the employer for reimbursement even at this late date. What would happen, and if your client doesn't feel like she would be reimbursed, why would she not??

The auditors point, regardless of rude appearances and unfair demeanor is as follows: Why should the government subsidize this taxpayer when reimbursement was a better option? If you approach from this perspective, you may determine there is a missing link in your client's position.

As to the $12,000 for investment advice (WOW! I should go into investment advisory too), would this not be a Miscellaneous Sch A deduction subject to 2% floor? If your client really spent this ridiculous amount of money, should she not be able to get the broker to furnish invoices, even if your client lost the first documents? If these documents can be retrieved, she should be entitled to the deduction upon appeal. Just don't sign off on the audit being complete until she has had a reasonable time to retrieve the documents.

[myerstaxes]

As a Former Revenue Agent

I agree the auditor was correct about the EBE expenses...If the employee could have been reimbursed and chose not to or neglected to do so, then there is no deduction allowed...Hopefully your client can go to her employer and obtain reimbursement at this late date, I had a client who did so...
Now about the investment fees, you said you did not have all of the substantiation, could it be that what you did provide as proof was not enough to clear the 2% floor? If that is the case then yes all would be disallowed making it appear that none was allowed...

[MariaMc]

In taxpayer's defense

The taxpayer was a project manager and extremely busy on projects. I have to say she probably wasn't organized enough to keep up with submitting reimbursements to her employer in the midst of flying back and forth between her home office and her onsite project in Texas. She also mentioned that their budgets were tight so although there was a reimbursement policy in place, she probably felt that she couldn't put all of her exps through for reimbursement. The company headquarters in her hometown closed so she was responsible for her own home office. She also had many exps to keep up her skills such as professional memberships, seminars, books, etc. I don't think that most people expect to put all those exps through to their employer.

The $12,000 in magament fees translate into 1% of assets. She has over a $1 million invested so this is quite typical. I don't think all of her documentation was thorough in this area but there were cancelled checks.

I am a young CPA and have not had a lot of audit experience so I feel frustrated. This audit could have been handled locally but I thought the correspondence audit would have been less invasive. Turns out they don't give you a chance to discuss anything with the auditor before they give their judgment.

[bertrans]

The taxpayer was a project manager and extremely busy on projects. I have to say she probably wasn't organized enough to keep up with submitting reimbursements to her employer in the midst of flying back and forth between her home office and her onsite project in Texas. She also mentioned that their budgets were tight so although there was a reimbursement policy in place, she probably felt that she couldn't put all of her exps through for reimbursement. The company headquarters in her hometown closed so she was responsible for her own home office. She also had many exps to keep up her skills such as professional memberships, seminars, books, etc. I don't think that most people expect to put all those exps through to their employer.

The $12,000 in magament fees translate into 1% of assets. She has over a $1 million invested so this is quite typical. I don't think all of her documentation was thorough in this area but there were cancelled checks.

I am a young CPA and have not had a lot of audit experience so I feel frustrated. This audit could have been handled locally but I thought the correspondence audit would have been less invasive. Turns out they don't give you a chance to discuss anything with the auditor before they give their judgment.

I agree completely with the auditor. If the employer has a reimbursement policy, and the employee does not avail himself of that policy [regardless of the reason: do not expect 'reasonab;le cause' considerations on this issue], then the expenses are deemed to be personal and not deductible.
This view is inferential - but very reasonably so. It flows efforrtlessly from the rational combining of IRC section 274 and Reg 1.274, plus Sec 162 and 212.

This has been the IRS position for quite a long time. This does not mean that you cannot
pursue a vigorous counter-argument. Fairness is a matter of perspective - and mutual courtesy.

[bertrans]

Further, a correspondence audit does afford ample opportunity for submission of documents and such; a TP, or TP-Rep, has the right to request a face-to-face audit: tax compliance officer (auditor) or revenue agent. And, as has been pointed out by another poster, you can request a reconsideration of the original audit.

[Edsel]

Hi Y'all!!

Hi Y'all! This here is Edsel from Alabama! [Duh!!] Shore do get smart readin' this stuff! Do y'all remember the highly successful Edsel by Ford Motor in the late '50s?

Maria, you may have worked yourself into a position where you can squeeze a few deductions just to dangle in front of them to get the audit over and done with. I don't think a face-to-face audit would have produced anything different.

Again, know the devil when you see him. The "defense" that the client and employer didn't have time to settle reimbursements smacks of something inconvenient. Lots of these executive-types don't want to take the time to do it, especially if they have received travel advances. But time constraints certainly didn't prevent her from delineating these expenses on her tax return, did they?

Maria, the 2% spoken of is applied against Adjusted Gross Income on her tax return, not total portfolio. This means that she would have to make $240,000 before the $12K would be totally disallowed. Of course, if she made more than that, she's toast.

[bertrans]

Hi Y'all! This here is Edsel from Alabama! [Duh!!] Shore do get smart readin' this stuff! Do y'all remember the highly successful Edsel by Ford Motor in the late '50s?

Maria, you may have worked yourself into a position where you can squeeze a few deductions just to dangle in front of them to get the audit over and done with. I don't think a face-to-face audit would have produced anything different.

Again, know the devil when you see him. The "defense" that the client and employer didn't have time to settle reimbursements smacks of something inconvenient. Lots of these executive-types don't want to take the time to do it, especially if they have received travel advances. But time constraints certainly didn't prevent her from delineating these expenses on her tax return, did they?

Maria, the 2% spoken of is applied against Adjusted Gross Income on her tax return, not total portfolio. This means that she would have to make $240,000 before the $12K would be totally disallowed. Of course, if she made more than that, she's toast.

Mr Edsel:

A word of clarification. English is not my native language. I learned it at school, formally. As a result, I write it formally. If that offends your apparent Constitutional objection to the use of formal English, I commiserate - and I rejoice that you are not representative of the fine ladies and gentlemen on this message board.

Thank you.

[ChEAr$]

I'm confused

Mr Edsel:

A word of clarification. English is not my native language. I learned it at school, formally. As a result, I write it formally. If that offends your apparent Constitutional objection to the use of formal English, I commiserate - and I rejoice that you are not representative of the fine ladies and gentlemen on this message board.

Thank you.

What was is now that Edsel said for which you must issue a clarification? I just don't
see no kind of communication between the two of y'all on this board.

?

[Snaggletoof]

Mr. Bertrans

Just a little clarification, "Edsel" is more representative of these "fine ladies and gentlemen" than you could ever imagine. Know the party before you attempt to place them a notch below everyone else.

I will give credit, however, to those among us for whom English is not a native language. Most of them have learned properly, and it carries forth in their spoken and written communication. Especially when it comes to the conjugation of subjective moods. To most of us who are a product of local culture, "mood" is what frequently happens to our wives.

Hang in there, Bertrans, you are a knowledgeable and relevant contributor and are an asset to the forum. Don't be suckered in by people pretending to be dumb. If you have heartache with Edsel, just wait 'til you hear from Black Bart.

[bertrans]

Just a little clarification, "Edsel" is more representative of these "fine ladies and gentlemen" than you could ever imagine. Know the party before you attempt to place them a notch below everyone else.

I will give credit, however, to those among us for whom English is not a native language. Most of them have learned properly, and it carries forth in their spoken and written communication. Especially when it comes to the conjugation of subjective moods. To most of us who are a product of local culture, "mood" is what frequently happens to our wives.

Hang in there, Bertrans, you are a knowledgeable and relevant contributor and are an asset to the forum. Don't be suckered in by people pretending to be dumb. If you have heartache with Edsel, just wait 'til you hear from Black Bart.

Wasn't impugning the poster; it was the apparent NEED to mock language. As for Black Bart, I know that he's excellent -and that his occasional playing with words is precisely and delightfully that: play!!

[taxxcpa]

Welcome Maria Mc.

As to the $12,000 for investment advice (WOW! I should go into investment advisory too), would this not be a Miscellaneous Sch A deduction subject to 2% floor? If your client really spent this ridiculous amount of money, should she not be able to get the broker to furnish invoices, even if your client lost the first documents? If these documents can be retrieved, she should be entitled to the deduction upon appeal. Just don't sign off on the audit being complete until she has had a reasonable time to retrieve the documents.

I have a client who is getting gouged by his broker for so-called investment management. I think his portfolio is mostly in money market funds--which really takes a lot of skilled management ability.

[Snaggletooth]

Yes, Really Brilliant

Taxxcpa, what about my 35-year old who has a SEP that his "advisor" put into a "municipal bond fund?" Where is Sea-Tax when we need him?