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IRS Reinstates High-Low Substantiation Method

By Alistair M. Nevius, J.D.

Please note: This item is from our archives and was published in 2011. It is provided for historical reference. The content may be out of date and links may no longer function.

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The IRS issued an update and new guidance regarding the use of the federal per diem rate to substantiate the amount of ordinary and necessary expenses for lodging, meals, and incidental costs paid or incurred for business-related travel away from home and reinstated the high-low substantiation method, which the IRS had intended to do away with (Rev. Proc. 2011-47).

The revenue procedure updates Rev. Proc. 2010-39. Besides providing guidance on application of the per diem rate to lodging, meals, and incidental expenses, the annual revenue procedures also provide rules for substantiating the cost of meals and incidental expenses that an employer or other third-party payer reimburses. Employees and self-employed taxpayers may use a per diem rate for meals and incidental expenses, or incidental expenses only.

Rev. Proc. 2011-47 also provides that taxpayers may continue to use the high-low substantiation method. In Announcement 2011-42, issued in July 2011, the IRS said it was discontinuing the method because it believed few taxpayers used it. (See News Notes, 42 The Tax Adviser 651 (October 2011).)

Subsequently, taxpayers that had been using the method (including the AICPA) requested that the IRS continue it. In addition, the revenue procedure clarifies that partners and volunteers who receive reimbursements may use the methods authorized by it to substantiate their expenses.

The IRS also issued the first of what it said will be separate annual notices (Notice 2011-81) providing the special per diem rates for use in substantiating expenses while traveling away from home under the rules in Rev. Proc. 2011-47. Specifically, the notice includes the transportation industry and incidental expenses rates, the rate for the incidental-expenses-only deduction, and the rates and list of high-cost localities for purposes of the high-low substantiation method.

The IRS stated that Rev. Proc. 2011-47 will be the last annual update of these substantiation rules and procedures and that going forward it will publish a new revenue procedure only as necessary.