This article is reproduced with permission from Spidell Publishing, Inc.
In August 2015, the FTB increased the number of audits of employee business expenses claimed on Schedule A for the 2011 and 2012 tax years. The current plan is to mail 10,000 to 50,000 correspondence letters to taxpayers who claimed these expenses.
The FTB is increasing the number of audits because they “… noticed a large number of taxpayers who claim unreimbursed employee business expenses on Schedule A that appear questionable.” This program is part of the FTB’s ongoing compliance program.
The FTB will begin the process by sending a letter asking the taxpayer to send:
- a copy of their employer’s policy or contract on expense reimbursement; and
- employment information as follows:
- Name and address of the employer;
- If a union member, the name of the union, local, and bargaining unit (if covered under a collective bargaining agreement);
- A detailed schedule of each unreimbursed employee expense, including the dollar amount and a description of the activity and business purpose; and
- A detailed transportation log, if claiming business mileage expenses.
Upon receipt of the taxpayer’s response, the FTB may follow up with a request for substantiation of some or all of the expenses. The letter also directs the taxpayer to file an amended return if the taxpayer finds that the deductions claimed were incorrect.
California generally conforms to Internal Revenue Code Section 162, which permits the deduction of all ordinary and necessary business expenses. However, there are a few particularly important exceptions:
- California does not conform to Internal Revenue Code Section 179 and bonus depreciation; and
- California law continues to treat cell phone use as listed property, therefore requiring greater substantiation of expenses claimed.
Valid employee business expenses are defined as:
- paid or incurred during the tax year;
- required to carry on a trade or business;
- ordinary and necessary;
- not reimbursed by the employer; and
- not eligible to obtain reimbursement from the employer.
Beware of these possible audit problems
We believe taxpayers may have potential tax assessments in these situations:
- Lack of substantiation, particularly when the taxpayer estimated the expense;
- Lack of complete and accurate contemporaneous automobile logs;
- deducting expenses that are reimbursable by the employer, but the employee failed to request reimbursement;
- Unsubstantiated travel, meal, and entertainment expenses;
- Incorrectly deducting expenses for club dues; and
- Uniform and related cleaning expenses that are not deductible because the uniform can be worn outside of work.
For more information about this article, please contact our tax professionals at firstname.lastname@example.org or toll free at 844.4WINDES (844.494.6337).