Computerizing travel and expenses.

Computerizing Travel and Expenses

T ravel and expenses recordkeeping requirements under Internal Revenue Code section 1.62-2(c)(2)(I) can be burdensome and time-consuming for employees and employers. According to private letter ruling 9706018, a company tried to reduce the paperwork burden by giving its employees a credit card that could be used only for business purposes. Each employee submitted an expense report on all charges and cash advances within one week after the expenses were incurred. The employer then paid the credit card company for all the substantiated charges.

The company requested the Internal Revenue Service to approve a new program that would eliminate most of the employee's paperwork by allowing the company to receive its documentary evidence electronically from the credit card company instead of from the employee. Because the expenses billed to the credit card constituted the bulk of the employees' travel and entertainment charges, most employees have to keep paper receipts only for expenses paid with cash advances or with their own funds or for those the company considers unjustified business expenses.

The IRS said the new program met the accountable-plan recordkeeping requirements of the IRC and therefore approved it. As such, the reimbursements were not included in the individual employee's gross income, reported on form W-2 or subject to withholding or employment taxes.

Observation: The IRS agreed to allow the company to use a new system on the condition the company conform to the requirements of revenue procedure 91-59. Companies that use automated data processing (ADP) should review the guidelines in 91-59 to ensure the accuracy and safety of the recorded information. Revenue Procedure 91-59 also includes information on how long records must be retained to satisfy the electronic recordkeeping retention rules.

—Michael Lynch, CPA, Esq., associate professor of accounting at Bryant College, Smithfield, Rhode Island.

  • Parents can claim a dependency exemption or a child care credit for an eligible child in their care pending adoption, even if they don't have a Social Security number for the child. By law, parents cannot get a child a Social Security number until after an adoption is final. According to Internal Revenue Service informational release 97-6, parents in the process of a domestic adoption need only write "U.S. adoption pending" in place of a Social Security number on their return and attach proof that the child is in their home awaiting a legal adoption. For foreign adoptions, parents must use form W-7 to obtain an individual taxpayer identification number from the IRS for the child.
  • Effective May 1, the fee the IRS charges for a copy of a tax return and related documents will increase from $14 to $23. Payment is due in advance using Form 4506, Request for Copy or Transcript of Tax Form. The charge for employee plans and exempt organization returns remains at $1 for the first page and $0.15 for each additional page.
  • The Eighth Circuit ruled the IRS can disclose tax information to a state if the state intends to use the information to prosecute an individual for failure to file returns and pay taxes. The information can only be disclosed under a tax coordination agreement between the state and the IRS under Internal Revenue Code section 6103(d). In a recent case (Frank J. Taylor v. United States, 8th Cir. Feb. 10, 1997), the court rejected Taylor's argument that financial privacy is a fundamental right.
  • A new form allows taxpayers to request federal income tax be withheld for specified federal payments that are not subject to mandatory withholding. The new Form W-4V, Voluntary Withholding Request, requests an automatic 15% withholding of unemployment compensation or a 7%, 15%, 28% or 31% withholding from Social Security and other specified federal payments.
  • According to private letter ruling 9705033, a small miscalculation can cost a taxpayer a lot of money. In 1995 a taxpayer took early retirement and received a $30,000 distribution from his individual retirement account. The taxpayer wanted this distribution to be the first of a series of substantially equal annual payments. The distribution, which was computed by an independent financial adviser, should have been $34,141. As a result the rest of the distributions had to be adjusted. Because of the disparity of distribution amounts, the IRS did not consider the periodic payments to be substantially equal and the entire distribution was subject to an additional 10% tax on early distributions.

    —Michael Lynch, CPA, Esq., associate professor of accounting at Bryant College, Smithfield, Rhode Island.


Qualified Plans and Self-Correction

T he Internal Revenue Service released a new administrative policy regarding self-correction (APRSC) to help employers that sponsor tax-qualified retirement plans and tax-sheltered annuities correct operational violations without adverse tax consequences. The new guidelines replace a more restrictive administrative policy regarding sanctions (APRS) in effect since 1991.

To be eligible for the APRSC, the plan sponsor or administrator must have established practices and procedures (formal or informal) reasonably designed to promote and facilitate overall compliance. These procedures must have been routinely followed and the operational violation must have occurred as a result of an oversight, a mistake in applying the procedures or an inadequacy in the procedures.

The IRS expects plan sponsors to fully correct violations for all the years in which the defects existed. The correction methods should restore the plans, the participants and their beneficiaries to the positions they would have been in had the defect not occurred.

A correction should be made by the end of the plan year that follows the plan year in which the violation occurred. However, an operational violation that has not been corrected within this time frame could be considered a "nondisqualifying" event eligible for APRSC if the IRS considers it insignificant.

Observation: In recent years, the IRS has ordered operational audits of selected employers' plans and has proposed to disqualify some large plans based on operational defects. The alternative for the employers was to pay large penalties. This prompted increased interest in voluntary compliance options that permit the plan sponsor to correct defects without risking disqualification or significant penalties. It is best for companies to audit their qualified plans to assess their exposures and to take advantage of opportunities for self-correction.

—Tracy Hollingsworth, Esq., staff director of tax councils at Manufacturers Alliance, Arlington, Virginia. N


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Black CPA Centennial, 1921–2021

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