IRS Challenges Reimbursements

By Raul Rivera

If I asked you to tell me the difference between accountable and nonaccountable reimbursements, would you be able to? I imagine some of you would and some of you would not. I also imagine that some of you would respond by asking me, “Why does it even matter?” 

This is a good question, and I will attempt to explain. 

Before I do, I think it is important to begin with some things we can all agree on. My guess is that we can all agree reimbursements are important, and it is also important that your church be able to properly handle all reimbursements. 

Yet what happens if your church is unable to reimburse you for a business expense that came out of your own pocket? What can you do then? 

You all are smart. I imagine many of you know that you may be able to deduct work-related expenses as an itemized deduction on your personal income tax return.

My question to you is: If the IRS was to challenge your itemized deductions of unreimbursed business expenses, would they hold up? 

Here is what we know from our CPA’s recent observation and experience - the IRS has recently increased its review and contention for individuals’ itemized deductions of unreimbursed business expenses on Form 2106.

There is much to discuss from this recent revelation, and we will do so in this blog. First, we must review and understand the difference between accountable and nonaccountable reimbursements. 

Accountable reimbursements vs. nonaccountable reimbursements

In short, here is what you need to know about accountable and nonaccountable reimbursements:

• Accountable reimbursements are not taxable to the individual receiving the reimbursement. 
• Nonaccountable reimbursements are taxable and should be included in the wages shown on your Form W-2.

When your church reimburses you, it does so through a reimbursement arrangement that your church has established. 

According to the IRS, “A reimbursement or other expense allowance arrangement is a system or plan that an employer uses to pay, substantiate, and recover the expenses, advances, reimbursements, and amounts charged to the employer for employee business expenses.”

In order for your church’s reimbursement arrangement to be considered accountable, it MUST be done under an accountable reimbursement plan or policy, otherwise any reimbursement will be deemed nonaccountable.

Your church's reimbursement arrangement MUST be done under an accountable reimbursement plan.

So, does your church or ministry have a reimbursement arrangement in place? If yes, are you confident that it meets the IRS’s requirements to be considered accountable? 

We will take a look at these requirements next. 

Does your church’s reimbursement plan meet the IRS’s requirements?

According to IRS Publication 463 and IRS Tax Topic 514, to be an accountable plan your church’s reimbursement or allowance arrangement must include all three of the following rules: 

1. You must have paid or incurred expenses that are deductible while performing services as an employee.
2. You must adequately account to your employer for these expenses within a reasonable time period (60 days after expenses were paid or incurred - see IRS Publication 463).
3. You must return any excess reimbursement or allowance with a reasonable time period (120 days after the expense was paid or incurred - see IRS Publication 463).

Our CPA examined the accountable reimbursement policy available through our StartRIGHT® Program, and he affirmed that the policy we provide is “excellent.”

This is great news! If you would like more information about our StartRIGHT® Program, then give us a call today at 877-494-4655.

What happens if your church’s reimbursement plan does not meet the IRS’s requirements?

If your church’s reimbursement arrangement does not meet all three requirements mentioned above, then it is a nonaccountable plan and the reimbursements you receive should be included on your Form W-2. 

You must report nonaccountable reimbursements as income, and you must complete Form 2106 or Form 2106-EZ and itemize your deductions to deduct your employee business expenses when you file your taxes. 

Herein lies the issue regarding the IRS’s recent contention toward unreimbursed expenses on Form 2106. The issue is that most people do not document why their itemized business expense deductions were unreimbursed by their employer. 

Therefore, the IRS is essentially saying that if an employer does not think an expense should be reimbursable, then why should the IRS think the expense should be reimbursable or deductible? 

Without an adequate accountable reimbursement policy in place at your church, this could potentially be bad news for you and other church employees.

Four things your church’s accountable reimbursement policy should contain 

At this point in the blog, you should be able to succinctly explain the difference between an accountable reimbursement and a nonaccountable reimbursement. Additionally, I hope you are beginning to see the importance of your church having an accountable reimbursement policy in place.

So, what should your organization’s accountable reimbursement policy include? I am glad you asked. 

Below are four things that your organization’s accountable reimbursement policy should contain: 

1. The policy should clearly explain the principles of a business connection, substantiation, and return of unused funds. It should also explain how any infractions on those principles would result in a denial of reimbursement. 
2. The policy should state the correct manner of reporting any expense on the employee’s Form W-2 or Form 1040. 
3. The policy should explain the protocol for taking an unreimbursed business expense deduction if the organization cannot support the reimbursement.
4. The policy should also explain that a denial letter with an explanation shall be issued for a legitimate business expense that cannot be reimbursed to an employee. 

Moving forward with confidence

If I were to ask you the same question that I asked at the beginning of this blog, all of you would be able to adequately answer the question. That is a good thing because it means you are growing in knowledge. 

It does not mean that you have “arrived” and you know all that you need to know about reimbursements. However, you are now able to more forward with more confidence when it comes to handling reimbursements. 

Many of you probably have more questions about reimbursements and that is okay. In fact, that is good because it is an indication that you are wanting to learn more. 

If you have additional questions, I encourage you to give us a call at 877-494-4655. If you are eager to learn and grow more, I invite you to join us at one of our conferences. 

You can ask one of our team members about our upcoming conferences when you give us a call, or you can find out more information by clicking on the link provided below.

Handpicked articles for you:

• “What Your Church Needs to Know About Reimbursements, Part 1”
• “What Your Church Needs to Know About Reimbursements, Part 2”
• “The Dangers of Copy and Paste”

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