ISSUE

The IRS is looking closely at substantiation of employee expenses and reimbursements.  Does your institution have proper policies/procedures in place?

For a sample Word file of an Accountable Reimbursement Plan Policy, go to:

http://Christiancollege-resources.org/resources

 

SITUATION

Saltwater Christian College (SCC) is a private college exempt under Internal Revenue Code section 501(c)(3) and 170(b)(1)(A)(ii).  They are required to file Form 990 annually.

Their CFO and Accounting team were work through our “tax checklist” when they came to these two questions:

  • Does your organization have an accountable expense reimbursement plan in accordance with IRS guidelines for expense reimbursements?
  • If so, is your plan in writing and made available to all employees through an employee manual or other published means?

They called to ask us to clarify these queries.  We told them that the IRS is stepping up their scrutiny of this arena and they should 1) have adopted a written plan that conforms to IRS rules, 2) make sure all employees are aware and trained on this policy, and 3) ensure that SCC is following the plan.

 

RULES

Paraphrased from Recent IRS Exam “Advisories”:

During our examination of the organization’s Form 990, and related records, we determined that you made reimbursements to employees without sufficient documentation to support the amount of the expenses.  In order for a reimbursement plan to be considered “accountable” the reimbursed expenses must meet the requirements of Treasury Regulation 1.62-2 (d), (e), and (f).

1.62-2(d) Business connection. In general. Except as provided in paragraphs (d)(2) and (d)(3) of this section, an arrangement meets the requirements of this paragraph (d) if it provides advances, allowances (including per diem allowances, allowances only for meals and incidental expenses, and mileage allowances), or reimbursements only for business expenses that are allowable as deductions by part VI (section 161 and the following), subchapter B, chapter 1 of the Code, and that are paid or incurred by the employee in connection with the performance of services as an employee of the employer.

1.62-2(e) Substantiation. In general. An arrangement meets the requirements of this paragraph (e) if it requires each business expense to be substantiated to the payor in accordance with paragraph (e)(2) or (e)(3) of this

section, whichever is applicable, within a reasonable period of time.

1.62-2(f) Returning amounts in excess of expenses. In general. Except as provided in paragraph (f)(2) of this section, an arrangement meets the requirements of this paragraph (f) if it requires the employee to return to the payor within a reasonable period of time may amount paid under the arrangement in excess of the expenses substantiated.

If an arrangement doesn’t satisfy on or more of the requirements of paragraphs (d), (e), or (f) of the section, all amounts paid under the arrangement are treated as paid under a “non-accountable plan.”  Amounts paid under a non-accountable plan are included on an employee’s W-2 and subject to withholding and payment of employment taxes (FICA/FUTA/RRTA).   

(**Please note that the IRS abbreviated their points from Treasury Reg. 1.62.2.  Underlines added.)

From Internal Revenue Code Section 274(d):

No deduction or credit shall be allowed-

(1) under section 162 or 212 for any traveling expense (including meals and lodging while away from home),

(2) for any expense for gifts, or

(3) with respect to any listed property (as defined in section 280F(d)(4) ), unless the taxpayer substantiates by adequate records or by sufficient evidence corroborating the taxpayer’s own statement:

(A) the amount of such expense or other item,

(B) the time and place of the travel or the date and description of the gift,

(C) the business purpose of the expense or other item, and

(D) the business relationship to the taxpayer of the person receiving the benefit.

 

BOTTOM LINE

  • In recent exams of not-for-profits, the IRS has looked closely at whether or not the organization operated under an “accountable” reimbursement plan for their business expenses.
  • Your institution should have a written Accountable Reimbursement Plan document in place.
  • You should carefully review the three “edicts” of the applicable Treasury Regulations: meets requirements, substantiation, and a reasonable period of time.
  • See the link above for a copy of ECFA’s “Accountable Reimbursement Plan Policy.”

 

Specific questions? Email Dave Moja

The information provided herein presents general information and should not be relied on as accounting, tax, or legal advice when analyzing and resolving a specific tax issue. If you have specific questions regarding a particular fact situation, please consult with competent accounting, tax, and/or legal counsel about the facts and laws that apply. 

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