February 24, 2014

Even Though IRS Executives Do Not Know It, Employee Travel Reimbursements Can be Taxable

Law 360, Holland & Knight Tax Compliance Blog
Kevin E. Packman

On Tuesday, February 18, 2014, the Treasury Inspector General for Tax Administration (TIGTA) issued a report reviewing the long-term travel of certain IRS executives and found that nine of the thirty one executives whose records they studied made mistakes on their taxes.1 The mistakes pertained to the taxability of travel reimbursements they received. The IRS was found to have failed to apply its own rules to long-term taxable travel of its executives. As a result, the IRS failed to withhold the appropriate amount of taxes on the travel reimbursements to these executives, and the executives failed to pay the correct tax. The issuance of the report is a wonderful time to remind taxpayers that not all business travel related reimbursements are tax free or deductible for self employed taxpayers.

Business travel comprises a large portion of many taxpayers' jobs. While traveling many taxpayers receive a daily per diem from their employers for things such as lodging and food, and others may receive reimbursements for such expenditures. These benefits are generally not taxable. For taxpayers who are self employed, Section 162(a) of the Internal Revenue Code permits them to deduct 100% of lodging expenses, 100% of travel expenses, and 50% of their meals incurred away from home in the pursuit of a trade or business. A taxpayer's home is their principal place of business. However, the deduction is limited to expenses incurred while "away from home." Yet, if a taxpayer is deemed to be away from home for more than one year, then the expenses are no longer deductible because the taxpayer will not be treated as temporarily away from home. Long-term taxable travel, is thus, extended business travel in excess of one year.

Revenue Ruling 93-86 was issued following the Energy Act of 1992, which contained a provision amending Section 162 to limit the deductibility of travel related expenses in excess of one year.2 The Revenue Ruling reviews three scenarios involving employment away from home at a single location, and provides as follows:

  1. employment will be temporary if in the absence of facts and circumstances indicating otherwise, it is realistically expected to last and does in fact last one year or less;
  2. employment will be indefinite regardless as to how long it actually lasts if there is no realistic expectation that it will last for one year or less; and
  3. employment, absent facts and circumstances indicating otherwise, is temporary during the period that there was no realistic possibility that it will last longer than one year, until such time that the expectation later changes.

For employment that is deemed to be temporary, reimbursements for travel expenses related to travel to that location are not taxable. Whereas, when the employment is deemed to be indefinite, then reimbursements are taxable.

Last week's report follows a TIGTA report from July 22, 2013, when it reviewed executive travel within the IRS and considered whether there were ways to reduce the $9 million that had been spent in the prior fiscal year on such travel.3 The new report includes as an appendix, a helpful flowchart demonstrating when long-term travel reimbursements are taxable.

The new report besides commenting on the errors the nine executives made with regard to the taxability of their travel reimbursements found that the IRS had released adequate guidance establishing when travel was taxable. This includes guidance to Federal Agencies on common situations involving payments and information reporting requirements taking the form of frequently asked questions and answers. Question 13 pertains to long-term taxable travel.4 The guidance interestingly does not broach on the taxability of any payments, rather it simply defines long-term taxable travel. It states as follows:

"[l]ong-term taxable travel is travel which lasts for more than one year, or for which there is a realistic expectation that such travel will last for more than one year, or for which there is no realistic expectation that such travel will end within one year. It includes local (daily) travel between a residence and a non-temporary work location and overnight travel away from the residence to a single location.

The realistic expectation for long-term travel is based on the current facts and circumstances. However, prior work at a work location is considered if there has not been a break of least seven continuous months since the employee's last visit to the location while on official duty."

1 http://www.treasury.gov/tigta/iereports/2014reports/2014ier005fr.pdf
2 http://www.mnerc.org/Resources/Documents/Revenue_Ruling_93-86.pdf‎
3 http://www.treasury.gov/tigta/iereports/2013reports/2013ier007fr.pdf
4 http://www.irs.gov/Government-Entities/Federal,-State-&-Local-Governments/Federal-Agency-Frequently-Asked-Questions

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