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August 24, 2005
IRS Clarifies Rules on Reimbursement for Employee Tools

The Treasury Department and the IRS have issued guidance concerning the application of the "accountable plan" rules to employee-owned tools.

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In a number of industries, employees provide their own tools to perform services and are reimbursed for the cost of the tools by their employers. Previously, the Treasury and the IRS clarified that such reimbursements must satisfy the accountable plan rules--expenses reimbursed under an accountable plan are excluded from income and wages; expenses that are reimbursed under a non-accountable plan are taxable.

The new revenue ruling clarifies that employers using accountable plans to reimburse employees for the cost of providing tools must substantiate the expenses reimbursed and, to the extent the plan provides payments before expenses are incurred, the plan requires the employee to return amounts in excess of the substantiated expenses. In particular, the guidance clarifies that an accountable plan may not use estimates to substantiate the amount of the expenses.

In addition to the guidance, the Treasury and the IRS are issuing a notice regarding criteria for considering proposals involving employer reimbursements of equipment expenses for the Service's Industry Issue Resolution (IIR) program. The notice identifies factors that would be considered in determining that the existing accountable plan rules are unworkable for an industry and thus relief may be appropriate. The notice also states that the mere cost of collecting records, substantiating expenses, and reconciling the expenses against reimbursements would not constitute grounds for relief from the requirements of the accountable plan rules.

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