The IRS recently issued Revenue Ruling 2006-56 providing guidance regarding an employer’s obligation to track the amount of per-diem expense reimbursements paid to their employees. Although this Revenue Ruling is not directly aviation related, it is applicable to flight crews, or any other employee engaged in business travel, and their employers.
Usually when an employer reimburses an employee for substantiated business expenses (meals and other incidentals associated with business travel) that amount is not subject to income or employment tax. An employee does not have to substantiate these expenses (e.g. provide receipts/documentation) as long as the reimbursement is equal to or less than the federal per diem rate.
However, according to the IRS, “Revenue Ruling 2006-56 tells employers that if they routinely pay per diem allowances in excess of the federal per diem rates, but do not track the allowances and do not require the employees either to actually substantiate all 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.” In other words, if per-diem reimbursements are going to exceed the federal rate, receipts and other documentation for all of the expenses will be required in order to avoid income and employment tax on the amounts reimbursed by the employer
Although Revenue Ruling 2006-56 is effective immediately, since employers may need some time to implement systems to accurately track and account for excess allowances, the results under Revenue Ruling 2006-56 will not be applied for taxable periods ending on or before Dec. 31, 2006 unless evidence of intentional noncompliance is found. If employees are receiving reimbursement rates in excess of the federal rate, they should start saving their receipts now.