Thursday, July 21, 2011

IRS Discontinues High-Low Method for Substantiating Travel Expenses

On Tuesday, the IRS announced that it is discontinuing the high-low method for substantiating lodging, meal and incidental expenses incurred in traveling away from home (Announcement 2011-42). Last year, the IRS asked for comments on whether the high-low method was still needed, and it received no comments.

Under the high-low substantiation method, if an employer pays a per diem allowance in lieu of reimbursing actual lodging, meal and incidental expenses an employee incurs when traveling away from home, the amount of the expenses that is deemed substantiated (under IRC § 274(d)) for each calendar day is equal to the lesser of the per diem allowance for that day or the amount computed at the rate provided in an annual revenue procedure for the locality of travel for that day or partial day. This method was intended to be a simplified substantiation method to be used in place of the regular per diem substantiation method using the federal per diem rate.

The IRS has annually issued an updated per diem rate for travel to any specified “high-cost locality” or other locality within the continental United States. Under the high-low substantiation method, the high or low rate, as appropriate, applied as if it were the federal per diem rate for the locality of travel.

The IRS says it plans to publish a revenue procedure later this year that will provide general rules and procedures for substantiating travel expenses (omitting the high-low substantiation method). It will then no longer publish annual updates, but it will publish a new revenue procedure only when it modifies the rules and procedures. However, the IRS will continue publishing the special transportation industry per diem rate in an annual notice.

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