United States

What can you learn from IRS travel costs?


Recently the Senate Finance Committee sent a letter to the IRS Commissioner suggesting the agency reign in its travel expenses. While the government is primarily concerned with spending taxpayer money prudently, certain expenses may also have specific tax rules so non-governmental businesses spending their own (or shareholders’) money should not overlook the lessons the IRS learned about its own spending.

Areas addressed with respect to IRS expenses included:

Lavish accommodations

The tax code specifically denies a deduction for lavish travel expenses. Unfortunately, the code does not define lavish and it depends on the specific circumstances of an expense whether the IRS would consider the expense lavish. Those circumstances may differ for a non-governmental entity but taxpayers should know that the rule exists rather than believing that any expense with a business purpose is automatically deductible.

Personal expenses treated as business travel

The letter covering IRS expenses also listed examples of IRS employees submitting personal expenses for travel to dinner and grocery shopping as business expenses. It is easy for employers to dismiss this as an area of concern because it may appear obvious that employees are not submitting mileage reimbursement claims for grocery shopping trips. Personal expenses are not always as obvious to spot, though.

  • Are employees properly tracking business and personal use of an employer-provided vehicle?
  • Do some employees work from home by choice and submit travel expenses when traveling to the office?

If an employer pays or reimburses personal travel costs, it is likely deductible for tax purposes so long as it is not lavish, but if it is a personal expense, it should be treated as taxable income to the employee and be subject to payroll taxes as compensation.

Living and working in different cities

It is has become common for employees to live and work in different locations. It may be personal choice to relocate and begin working from home, a temporary work assignment in another location, or a time lapse between beginning a new position in one location and moving your residence to that location. In each situation, the facts regarding where, when, and why the person is living and working will be important to determining the proper treatment for tax purposes. In many instances, employers may be treating expenses that do not qualify as business travel under the tax rules improperly and opening themselves to risk of underreporting taxable compensation.

Business-related travel is common today, and often has many benefits to the business. However, employers paying for such travel should carefully review their policies to ensure proper tax reporting of the costs. Understanding the income and payroll tax consequences will remove risk of underreporting associated taxes.

Anne Bushman

Senior Manager

Anne advises companies on various executive compensation, employee stock ownership and employee benefits matters affecting closely-held businesses. Reach her at anne.bushman@rsmus.com.

Areas of focus: Washington National TaxCompensation & BenefitsTax Reform