The benefits of accountable expense reimbursement plans

Gary P. Johnson was employed as an insurance adjuster. He had to travel to do his work. He paid a lot of lodging, meals and incidental expenses to do the work related travel.

His employer issued him a W-2 for 2013 for $131,884 that included as wages $42,812 of per diem travel allowances that he was paid. By issuing a W-2 for the travel allowances, it seems the employer didn’t have an accountable expense reimbursement plan.

Gary prepared his 2013 individual income tax return and claimed the travel expenses as an itemized deduction on Schedule A of form 1040. He claimed “unreimbursed employee business expense” deductions of $27,796 (after reducing his costs by the 2 percent limitation that applies). He did report the total W-2 amount as wages.

However, IRS pointed out his return didn’t include the form 6251 Computation of Alternative Minimum Tax. IRS sent a notice of deficiency July 20, 2015 (for the 2013 return) of $3,621.

The U.S. Tax Court felt this was such an easy case it’s reported as a memo decision — not a precedent for any other case. It all came down to whether his travel allowances were paid in accordance with an accountable reimbursement plan or not.

To qualify as an accountable plan, the plan must have a business connection; require substantiation of expenses; and require the return of amounts paid greater than the expenses incurred.

Since Gary was entitled to and was paid the per diem allowances regardless of whether he paid any qualifying expenses and he wasn’t required to report and return any excess, the court found the payments weren’t paid pursuant to an accountable plan.

The court found the IRS notice to be correct and Gary had to pay the deficiency.

It’s interesting to note the total of the per diem payments was quite a bit more than the costs of business travel Gary claimed.

It would’ve been better if his employer had an accountable reimbursement plan, but Gary probably would’ve had to refund some of the per diem if his expenses were less.

This is just another area of the tax law Congress could address. Mainly the problem of the Alternative Minimum Tax that was meant to require millionaires to pay some tax. That provision does raise some money, but the complications of that form are time consuming and confusing.

Did you hear? “The good that men do lives after them,” said Ruth Gordon, actor.

John Bullis is a certified public accountant, personal financial specialist and certified senior adviser who has served Carson City for 45 years. He is founder emeritus of Bullis and Company CPAs.