IRS Updates, Clarifies Travel Allowances, Reinstates High-Low Method

The IRS issued an update and new guidance September 30 (Rev. Proc. 2011-47) for use of a 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. The IRS stated that this revenue procedure would be the last annual update of these substantiation rules and procedures, and that going forward it only will publish a new revenue procedure as necessary.

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 only that an employer or other third-party payor reimburses. Employees and self-employed taxpayers may use a per diem rate for meals and incidental expenses, or incidental expenses only.

The new revenue procedure 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. Subsequently, taxpayers that had been using the method requested that the Service 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.

Also on September 30, the IRS 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.