Travel and Entertainment Compliance

Tax Professionals' Resource
May 17, 2013 — 1,345 views  
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The employee travel and entertainment costs make up for a reasonable amount of an organization’s expenses. To ensure that the expense settlement and deductions are carried out in a proper way without any complaints, it is necessary that you follow some good practices. Also, ensure that you carry out the procedure with the IRS rules and regulations in mind.

Follow Automated Practices

Manual expense reporting can prove to be irritating and time consuming for all those involved. To avoid this it is recommended that you follow expense management automation (EMA) practices. EMA helps companies to reduce the cost of expense by quickly collecting information and enforcing company policies. Incorporating an automated system can save time and effort for tax professionals while dealing with such compliance issues. This expense automation management should be carried out as a part of the total cost management process.

Record Keeping by the Employee

Tax professionals should see to it that the employees claiming travel and entertainment compliance keep their records updated. If an employee claims deductions for travel, transportation, gift, or entertainment expenses, then he/she will be required to substantiate certain elements off the expenditure. Adequate proof can be kept in a statement of expense, a log book, or a trip sheet. They should also have enough documents that support each and every expense that has been recorded. The employees must maintain the records as long as they are needed by the IRS. This will generally include a period of 3 years from the date you file the specific income tax return. 

The IRS Rules

In order to obtain travel and entertainment compliance, the IRS requires employees to give a written statement regarding the purpose of the expense, unless it is clear from the circumstances and facts. These will include expenses for lodging while away from home and other expenditures which are above 25 dollars. Lodging for less than 75 dollars will not be accounted for. This excludes transportation charges, in case necessary documentation evidence isn’t available.

Documentary evidences should include documents that have the place, time, date, and character of expenditure. In some cases a document alone may not suffice to support the expenditure claim. For instance, if a check is cancelled, then submitting documents regarding that cancelled check alone won’t be enough. The employee will also have to submit the cancelled check together with the receipt bill from the payee to establish the expenditure claims.

Substantial Compliance

In some cases the IRS allows deductions, even if all the documentary evidences aren’t supplied completely, provided the employee has substantially complied with the requirements regarding submission of adequate records. To determine whether there is substantial compliance, tax auditors should check for some factors. Documents should include the type of expenditure that is involved, the number and type of missing documents, and the reason why the expense was not substantiated properly.

In case the employee does not have enough of a complete record to prove an element of expense, then he/she should provide an oral or written statement which contains specific information regarding that particular expense. They should also provide other evidence that supports the validity of the missing element.

The Reimbursement

Employees who provide the records and documentations are generally reimbursed without any problem. But they will have to provide the required evidence if the claim deductions for expenses are more than the reimbursements, and if the employee expenses are being reimbursed under a non-accountable plan.

Tax Professionals' Resource