Auditor guidelines on business travel and meal per diems after Rev. Rul. 2006-56.

• Author: O'Driscoll, David

Auditor Guidelines on Business Travel and Meal Per Diems after Rev. Rul. 2006-56

An IRS examination memorandum provides guidelines to examiners auditing excess perdiem payments in light of Rev. Rul. 2006-56. The issue involves taxpayers who pay reimbursement allowances to employees for travel expenses in an amount exceeding the Federal per-diem rate, without treating such excess amounts as wages for employment tax purposes.

Payments for employee business travel and meal expenses under an accountable plan are treated as nontaxable expense reimbursements. In contrast, payments under a nonaccountable plan are wages that must be reported on Form W-2 and are subject to employment taxes and withholding. If the facts and circumstances evidence a pattern of abuse of Sec. 62(c), including the rule to treat excess allowances as wages, all payments under the arrangement are treated as wages; see Regs. Sec. 1.62-2(k).

Rev. Rul. 2006-56

Rev. Rul. 2006-56 provides guidance as to the proper employment tax treatment of expense allowance payments when an employer fails to treat amounts exceeding the Federal per-diem rate as wages. The ruling holds that a taxpayer's failure to track excess allowances and its routine payment of excess allowances not treated as wages evidences a pattern of abuse and causes all payments made under the expense allowance arrangement to be treated as made under a nonaccountable plan.

Pre-2007 Payments

The ruling was effective Nov. 13, 2006. However, most taxpayers not currently in compliance as to the treatment of excess per-diem payments will need time to update or purchase accounting software enabling them to compute the proper amount of additional wages. So, for tax periods ending before 2007, absent egregious circumstances or evidence of intentional noncompliance, the examiner should not treat a plan as entirely nonaccountable solely because excess per-diem payments were not treated as wages. Instead, only the excess amounts over the Federal perdiem limit should be treated as wages.

Periods after 2006

For periods ending after 2006, the examiner will...