Accountable Plans and the IRS

Accountable Plans and the IRS

In a 2010-2012 audit initiative, the IRS found many businesses were either not familiar with the accountable plan rules, or were not following them. It seems likely, therefore, that the IRS is going to apply more scrutiny to the issue of accountable plans when auditing businesses and their owners.

An accountable plan is a business plan for expense reimbursement or advances that satisfies the following requirements:

(1) Reimbursements/advances are only made for deductible business expenses incurred in the performance of employee duties;

(2) Reimbursements/advances are substantiated through an expense report, diary, log, trip sheets, or similar record such as a detailed receipt;

(3) Excess advances are returned to the business (except for cases where an allowance doesn’t exceed per diem rates); and

(4) Substantiation and returns of excesses occurs within a reasonable period.

If the IRS finds that these rules are not being followed, reimbursements or advances will be taxable compensation to the employee and subject to income tax and employment tax withholding.  The employee might be able to offset this additional income with an unreimbursed employee business expense deduction, but only for amounts that exceed 2% of his or her adjusted gross income (this deduction is not available for AMT purposes).  There is also the additional pain for both employer and employee of incurring payroll taxes.

The bottom line:  be sure that your company’s expense reimbursement plan meets the requirements of an accountable plan!

About the Author:

Coben is a manager at Bregante + Company LLP, providing tax and audit expertise to a diverse client base composed primarily of closely held companies, high net worth individuals, and nonprofit organizations.