Why the IRS Keeps a Close Eye on Expense Tracking for Upper-Level Executives: Part 4

Editor’s Note: This article is the last in a four-part series on reporting travel and entertainment expenses. Part 3 can be found here. 

All too often, companies apply a double standard when monitoring expense reimbursement. For instance, an entry-level worker may be required to provide extensive documentation for relatively minor expenses, while executives enjoy greater latitude and reduced oversight. Aware of this disparity, the IRS closely scrutinizes business expenses for highly compensated employees.

Corporate credit card practices illustrate the differences between executives and regular employees, according to Marianne Couch, principal at Cokala Tax Information Reporting Solutions. Lower-level employees must follow credit card reimbursement policies and submit documentation, while upper-level executives use corporate cards as they see fit—and the organization often covers executives’ charges without even receiving an expense report from them. These different standards in tracking business expenses make it difficult for accounts payable to distinguish taxable expenses from tax-exempt expenses and put the organization at risk for noncompliance penalties.

In general, any benefits offered only to highly compensated employees come with increased scrutiny and restrictions, according to Couch. Here are a few examples.

1. Bonuses, awards and low-cost loans. From the perspective of the IRS, these may represent attempts to disguise taxable compensation.
2. Club memberships. Often organizations pay for executives’ club memberships, disguising the fees as deductible expenses when they should be treated as taxable wages.
3. Employer-paid vacations and non-business flights. The IRS especially scrutinizes travel reimbursements that involve a spouse or dependents, as these are likely personal expenses that should be reported as taxable income.

Enforcing corporate travel policies is a major challenge in expense management, especially at the top, where an employee may feel reluctant to rein in an executive’s spending. An effective expense policy can improve communication at all levels and clarify reimbursement expectations, resulting in greater compliance with IRS rules.

Automating travel expense management has the additional advantage of de-personalizing the administration process. With expense report software, enforcement comes from the system, which is based on approved rules and policies, rather than a person. Removing the human element improves employee relationships and returns everyone’s focus to the objectives of the organization, where it belongs.

For more tips, please check out the earlier articles in our four-part series on how to report travel and entertainment expenses.