Employer-provided tax preparation not a working-condition fringe.

• Author: Koppel, Michael D.
• Position: Gross Income

In FSA 200137039, the IRS National Office ruled that tax preparation services provided to an employee as a condition of employment were not working-condition fringe benefits that he could exclude from income under Sec. 132. Rather, the professional services were taxable income to the employee for both income and employment tax purposes.

A company sent employees to work overseas. To ensure that the employees were fairly compensated for accepting this assignment, the company engaged an outside public accounting firm to prepare their income tax returns, and calculated the cost equalization of income taxes, housing and other personal living expenses. The company required the employees to use the public accounting firm. The firm charged the employees only for professional tax services for issues not related to their employment.

The company position was that the provision of tax preparation services was an excludible working-condition fringe, citing Rev. Rul. 92-69, under which outplacement services were found to qualify under Sec. 132. In that ruling, the Service noted that, for exclusion under Regs. Sec. 1.132-5(a)(2)(i):

(1) the employer derives a substantial business benefit from the provision of the property or services that is distinct from the benefit that it would derive from the mere payment of additional compensation, and (2) the employee's hypothetical payment for the property or services would otherwise be allowable as a deduction by the employee under section 162.

In FSA 200137039, the IRS ruled that employer-provided tax preparation services failed both of the tests; the company did not have to pay for the employees' income tax preparation to be able to calculate the cost-equalization adjustment. The company could simply obtain copies of their returns to make the calculations. Nevertheless, the Service acknowledged that only the adjustment calculation was an excludible working-condition fringe.

After finding that the payment constituted compensation for both income and employment tax...