An IRS examination memorandum provides guidelines to examiners auditing excess per-diem payments in light of Rev. Rul. 2006-56. The issue involves taxpayers who pay reimbursement allowances to employees for travel expenses in an amount exceeding the Federal per-diem rate, without treating such excess amounts as wages for employment tax purposes.
Payments for employee business travel and meal expenses under an accountable plan are treated as nontaxable expense reimbursements. In contrast, payments under a nonaccountable plan are wages that must be reported on Form W-2 and are subject to employment taxes and withholding. If the facts and circumstances evidence a pattern of abuse of Sec. 62(c), including the rule to treat excess allowances as wages, all payments under the arrangement are treated as wages; see Regs. Sec. 1.62-2(k).
Rev. Rul. 2006-56
Rev. Rul. 2006-56 provides guidance as to the proper employment tax treatment of expense allowance payments when an employer fails to treat amounts exceeding the Federal per-diem rate as wages. The ruling holds that a taxpayer’s failure to track excess allowances and its routine payment of excess allowances not treated as wages evidences a pattern of abuse and causes all payments made under the expense allow-ance arrangement to be treated as made under a nonaccountable plan.
Pre-2007 Payments
The ruling was effective Nov. 13, 2006. However, most taxpayers not currently in compliance as to the treatment of excess per-diem payments will need time to update or purchase accounting software enabling them to compute the proper amount of additional wages. So, for tax periods ending before 2007, absent egregious circumstances or evidence of intentional noncompliance, the examiner should not treat a plan as entirely nonaccountable solely because excess per-diem payments were not treated as wages. Instead, only the excess amounts over the Federal per-diem limit should be treated as wages.
Periods after 2006
For periods ending after 2006, the examiner will determine whether the plan is abusive, based on (1) the extent of the excess payments not treated as wages and (2) whether a system for tracking excess payments is used. The examiner should apply the following criteria:
-
When does an employer routinely make payments in excess of the deemed substantiated amount? The agent should apply the criteria in IRS Legal Enforcement Manual (LEM) 4.23.5. If the LEM criteria are not met, excess payments will not be a pattern of abuse, absent other significant plan defects.
-
When does an employer fail to track excess allowances? If the criteria in LEM 4.23.5 are satisfied, the agent must determine whether the employer uses a system to track allowances that permits it to determine when the allowances paid to its employees (computed on a per-diem basis) exceed the deemed substantiated amount, and to treat such amounts as wages. If the employer uses such a system, the fact that the employer, due to errors in its system, routinely pays excess allowances that it does not treat as wages generally does not, on its own, evidence a pattern of abuse. Each case stands on its own facts and circumstances.
-
If a plan evidences a pattern of abuse, all of the per-diem payments made under the plan will be treated as taxable wages.
-
If a plan does not evidence a pattern of abuse, but an employer has paid excess allowances without treating them as wages, only the excess per-diem payments will be considered taxable wages.
IRS Memo for All Field Examination Operations, 11/3/06
