Joseph Smith's monthly column
Joseph Smith EA is the author of this column. He happens to be PanTravelers CFO, and is the leading tax expert in the country for traveling healthcare professionals and agencies. A former traveling respiratory therapist, he now has a thriving tax preparation and consulting business. He is also a regular contributor to Healthcare Traveler magazine and is a helpful presence on traveler forums such as Travel Nurses & Therapists. Joe maintains one of the best traveler resources at traveltax.com.
What you can learn from audits
Audits of travelers and agencies are on the rise and they are not likely to slow down for quite some time. The tax free payments that are common in our industry along with the large amount of business expenses that show up on traveler returns magnify the possibilities of an audit.
There are a number of agencies that neglect to follow the regulations governing reimbursements and per diems. Since reimbursements are generally exempt from payroll taxes, there is a strong motivation to pay as much tax free as possible. Lately, the IRS has adjusted the focus of their audits to address the source of the payments (agencies) rather than the traveler/recipient of the payment. The process by which this takes place often starts with traveler examinations.
- For example, an auditor notices that during a traveler audit, the reimbursement policy of the agency is flawed. He/she then tells their supervisor who passes this info to another division to investigate. In order to gather evidence of the flaw in the agencies documentation, 30 travelers employed by the agency are audited. After gathering convicting evidence, an audit of the agency ensues.
In the course of my work, I defend a lot of traveler audits. In recent audits, I have noticed some very specific requests that are indicative of this focus. A recent request from an appeals agent asked for the following:
- Obtain reimbursement statements from your employer on their business letterhead specifically mentioning your client by name and tax year. On the letter it also should state:
What the traveler could be reimbursed for
What the traveler was reimbursed for
How the traveler was reimbursed
Sounds detailed? This is some of the information the IRS will glean from this:
1) Responsible party in the corporation
2) Actual location of the payroll manager’s office (possibly outsourced etc)
3) The process of documenting the reimbursements
4) The items that are being reimbursed
5) Is the payment of the reimbursement identified separately?
6) Is the reimbursement treated like a wage?
7) Are they giving a full per diem for lodging and then subtracting expenses? (you cannot do this)
8) Are meal and lodging allowances included in the per diem (per diems must include both)
9) Whether the agency has a reimbursement policy
To the traveler, these audits seem like intrusions yet they are not directed at the traveler. Also, the auditor in charge of the examination is usually unaware of the reason or source of the audit even if it is criminal. The requests just go through the appropriate channels and the data is sent to the requestor. The moral to this story is that the traveler should always practice the same care with their tax documents regardless of the potential for an audit. It is simply a risk that we assume in our travels.