IRS To Scrap “High-Low” Simplified Per-Diem Rates For Business Travel

Ann. 2011-42, 2011-32 IRB

In a new announcement, IRS has revealed that it intends to do away with the “high-low” method of substantiating away-from-home travel expenses.

Background. An employer may pay a per-diem amount to an employee on business-travel status instead of reimbursing actual substantiated expenses for away-from-home lodging, meal and incidental expenses (M&IE). If the rate paid doesn't exceed IRS-approved maximums, and the employee provides simplified substantiation (time, place and business purpose), the reimbursement is treated as made under an accountable plan—it isn't subject to income- or payroll-tax withholding and isn't reported on the employee's Form W-2. Receipts of expenses aren't required.

In general, the IRS-approved per-diem maximum is the GSA (general services administration) per-diem rate paid by the federal government to its workers on travel status. This rate varies from locality to locality.

High-low rates. Since at least the early '90s, instead of using actual per-diems, employers have been able to use a simplified “high-low” per-diem, under which there is one uniform per-diem rate for all “high-cost” areas within the continental U.S. (CONUS), and another per-diem rate for all other areas within CONUS. For example, under the optional high-low method for post-Sept. 30, 2010 travel, the high-cost-area per diem is $233, consisting of $168 for lodging and $65 for M&IE. The per-diem for all other localities is $160, consisting of $108 for lodging and $52 for M&IE. (Rev Proc 2010-39, 2010-42 IRB 459, Sec. 5.02)

“High-low” method will be discontinued. In Rev Proc 2010-39, IRS asked for comments on whether the high-low method was still needed. Having received no comments, IRS says it intends to discontinue this method.

Observation: There's no indication of when the high-low method will be discontinued, so employers currently using it should continue to do so until IRS says otherwise. Under Rev Proc 2010-39, there are a number of restrictions on use of the simplified per-diem method. One of these states that a payor using the high-low substantiation method for an employee must use it for all amounts paid to him or her for travel away from home within CONUS during the calendar year. However, the payor may still reimburse the employee's actual expenses, use the meals-only per-diem method, or use the regular federal per-diem rate for travel outside CONUS.

In 2011, IRS will publish a revenue procedure providing the general rules and procedures for substantiating lodging, meal, and incidental expenses incurred in traveling away from home (omitting the high-low substantiation method). It will publish a revenue procedure in subsequent years only when modifying the substantiation rules and procedures, and will publish the special transportation rate in an annual notice.

Observation: Under the special transportation rate, payors in the transportation industry may use a uniform amount as the M&IE rate for all localities within CONUS and a larger uniform amount for all localities outside of CONUS. These amounts currently are set at $32 and $36, respectively.

References: For high-low per-diem rules, see FTC 2d/FIN ¶L-4718; United States Tax Reporter ¶2744.18; TaxDesk ¶296,020; TG ¶17824.