What IRS publication has regulations on employee reimbursements and travel & expense reports? If the employee doesn't provide the required receipt, will it be considered taxable income?


There are a couple of IRS publications that lay out the guidelines for business expense reimbursement, including what are acceptable expenses and what documentation is necessary to prove the charges under an accountable plan. If there is not proper documentation, the IRS will disallow the deduction for the business as it relates to the tax records. Part of the definition of an accountable plan is that there must be a reasonable accounting of expenses. If there is no reasonable accounting, then the IRS views it as a nonaccountable plan. IRS Revenue Ruling 2006-56 (our thanks to Rosie Nicholson, assistant controller for TD Industries) addresses this. The ruling says where an expense allowance arrangement has no mechanism or process to track allowances paid and routinely pays per diem allowances in excess of the federal per diem rates without requiring actual substantiation of all the expenses or repayment of the excess amount, all payments made under the arrangement will be treated as made under a nonaccountable plan; consequently the entire amount of the expense allowance is reportable on the W2 and subject to income and employment tax.

A good practice is to require the minimum documentation outlined by the IRS and if it is not followed by the employee, then do not reimburse for the expense until the documentation is satisfied. This approach, of course, will depend upon management's philosophy on what is acceptable.

Your question about documentation is also a good one for the Forums/Messaging section of the site where you can get feedback from your peers about how they handle expenses that do not have the proper documentation. A member may have been able to implement a policy that seems to get everyone to comply. The IRS resources for travel and entertainment expenses can be found in publication 463. Click here to go to the IRS write-up summarizing the publication. The IRS also provides a good online chart to give you guidance on how to prove certain business expenses.

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