Employee Business Expense Reviews
Tax practitioners, taxpayers and tax return preparers often contact me with questions about DOR’s employee business expense project. Over the last several years, DOR has used automated programs to flag returns that may require further review which generates a form letter to the taxpayer requesting more back-up information on employee business expenses.
Here’s what to expect if you get such a notice of an audit review. First, for background, download IRS Publication 463 which gives detailed explanations for employee business deductions and what records taxpayers are required to substantiate the claimed expenses. (It’s always a good idea to review this publication at the start of every tax year for tax planning purposes.)
Second, respond to the letter by mailing the requested documentation to the DOR. If you need more time to put together your response, you must contact the Department of Revenue at the number listed on your notice. If you ignore the letter, remember the clock is ticking and additional tax plus penalty and interest will be due if the expenses are disallowed.
Documents that prove travel, lodging, entertainment or transportation expenses should be quite detailed, listing the amount, time, place and business purpose of each expense. Expenses must be logged as they are incurred. Records for mileage expenses must include a mileage log with the date, beginning and ending odometer readings, locations, the name of the person or business you met with, as well as the business purpose of the meeting. Additionally, taxpayers who claim employee business expenses may be asked to submit the written reimbursement policy issued by their employer. Taxpayers who can be reimbursed for employee expenses by their company but choose not to submit claims cannot then claim these expenses on their federal or state tax returns.
For Massachusetts tax purposes, remember that for many employees, only expenses for travel, meals and lodging while away from home or main place of business are allowed. Outside salespersons are allowed these expenses plus all federally deductible unreimbursed employee business expenses. (See Directive 89-1: Directive 89-1: Employee Business Expenses).
So before you deduct employee business expenses on Schedule Y of your individual Massachusetts income tax return make sure you can back up your claims with the necessary documentation that’s required. This will save you time and money should your tax return be selected for review.