New guidance from the Internal Revenue Service stresses the need for employers to track the amount of expense reimbursement allowances paid to employees on a per diem basis.

In a revenue ruing, the agency said that if employers routinely pay per diem allowances in excess of the federal per diem rates -- but do not track the allowances, require employees to either actually substantiate the expenses or pay back the excess amounts, and do not include the excess amounts in the employee’s income and wages -- then the entire amount of the expense allowances is subject to income tax and employment tax.

The revenue ruling, which uses a scenario in the trucking industry, illustrates a per diem allowance arrangement that fails to track the excess amounts and does not include the unsubstantiated, un-repaid excess amounts in the employee’s income and wages -- constituting a pattern of abuse. The finding that the arrangement is abusive causes all allowances paid under the arrangement to be subject to income tax and employment tax, not just the excess amounts.

The ruling is effective immediately, though the agency is issuing instructions to its agents not to apply the results under the revenue ruling for taxable periods ending on or before Dec. 31, unless there has been intentional noncompliance.

The ruling is available at www.irs.gov/pub/irs-drop/rr-06-56.pdf.

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