The IRS has issued a strict warning to employers misusing per-diem reimbursements:
Starting Jan. 1, it will no longer tolerate any employer’s travel-reimbursement plans that pay more than the federal per-diem rates without proper substantiation.
After that date, the IRS says, it will start treating all travel reimbursements — not just those above the approved per-diem rate — as taxable wages, subject to full withholding and employment taxes. (IRS Revenue Ruling 2006-56)
The crackdown stems from a new ruling against a trucking firm that, the IRS says, illustrates how some employers abuse the system (see “Facts of the ruling” below).
The IRS cited several serious errors by the employer, including:
- Failing to track excess travel allowances.
- Routinely paying excess allowances that were not repaid or treated as taxable wages.
- Making excess payments to more than one employee and over more than one limited period.
Strategy: If you haven’t done so already, create a travel-reimbursement plan that does the following:
- Requires employees to repay any away-from-home meal and incidental expenses that they can’t substantiate as incurred for business reasons.
- Includes any excess amounts in employees’ taxable wages.
Facts of the new ruling: A long-distance trucking firm reimbursed drivers for away-from-home meal and incidental expenses (M&IE) based on industry figures for miles traveled each day. Statistically, using that per diem represented a fair estimate of actual expenses and was common to the trucking industry at the time. (The IRS has “grandfathered” this method.)
But the trucking firm routinely paid out reimbursements that often exceeded the federal perdiem amount for the year (even when averaged out over a month rather than daily) and did not require drivers to return those amounts, which were generally small in comparison to the total reimbursement.
Also, the employer did not treat the excess reimbursements as extra wages for income-tax or employment-tax purposes.
Important point: While a per-diem reimbursement plan may simplify reporting and substantiation requirements, it does not give employers carte blanche to disregard the remaining rules. Nevertheless, employers can meet the substantiation requirement automatically if all payments are made under an “accountable plan” in which no payment is made for more than the federal perdiem rate.
Based on those factors, the IRS concluded that the trucking firm’s arrangement was neither structured nor did it operate to meet the requirements of an accountable plan.