Relocation Audits by the IRS

One of the most confusing aspects of relocation is the tax consequences that are associated with providing relocation benefits to an employee. During my last 15 years in the relocation business I have heard time and time again from human resource professionals that they are correctly recording the taxable part of relocation . Even after I explain to them that they are doing it incorrectly, they still insist that their method is correct.

Why is this topic so imporant? IRS fines associated with relocation average between $6,000 and $8,000 per employee based on ERC data (http://www.erc.org/). If a company moves an average of 10 employees a year and you have not recorded relocation associated expenses as taxable income, you could be facing fines of up the $80,000.

Let's explore some scenarios that I have recently encountered and provided consultation:

Case Study 1 - House Hunting Trips -- Company A offers their new hires two house hunting trips for the trailing spouse. The trips cover air fare, car rental, meals and lodging. On average the company budgets $1100.00 per employee per house hunting trip to cover these expenses. Company A has their corporate travel department make all of the arrangements and invoice the company. Company A records these expenses as a business expense under the rules of business travelers. Is Company A properly recording these expenses?

Case Study 2 - Temporary Housing -- Company B offered an employee up to 6 months of temporary housing at the new location while their house was on the market at the old location. The employee reported to work at the new location and checked into temporary housing provided by a corporate lodging company. Company B recorded the next 6 months of lodging costs as a business expense because the employee had not sold their house and moved their family. Is Company B properly recording these expenses?

Case Study 3 - Reimbursement for Final Trip Miles -- Company C outlines in their policy that they will reimburse their relocating employees the prevailing IRS rate for mileage reimbursement. The Company interprets this rate to be the Business Mileage rate. They have the employee calculate the miles and submit the miles driven on an expense reimbursement. The company cuts an expense check to the employee. Did Company C properly reimburse these expenses?

Answers to Case Studies:

Case Study 1: This is a taxable benefit and should be recorded as income to the employee and taxed accordingly. (http://www.irs.gov/ ; Pulication 521)

Case Study 2: This is a taxable benefit to the employee and should be recorded as income to the employee and taxed accordingly. (http://www.irs.gov/ ; topic 511)

Case Study 3: The IRS has two separate mileage reimbursement rates. One for business milage and one for moving miles. Because Company C reimbursed at the Business mileage rate, part of this reimbursement is taxable and part is excludable. The portion of the reimbursement that is excludable needs to be recorded on the employees W-2 in Box 12 with a Code P. The taxable portion needs to be included as part of gross income and taxed. In the future, all relocation related mileage should be reimbursed at the IRs rate for moving purposes.

There are many different questions that I field on a regular basis in relation to relocation tax issues. Expense Management is one of the many services that we offer. We handle the complete recording and reimbursement of employee relocation expenses. Please call me or email for questions or more information about our services.