Expense Accounts & the Law

February 19, 2016

Financial scandals that have revealed employees or business people fraudulently using their expense accounts confirm that businesses need to keep an eye on the activities of their employees. In 2012, a senior official for the Port of Oakland was exposed for spending his expense account money at a strip club. He was forced to resign.

Not all expense account abuses are so shocking. In many industries, providing employees with expense accounts is a necessity. This is especially true for sales, or any industries in which an employee is required to travel for work. Most employees honor the rules and don’t abuse their privileges. Put simply, an expense account is the right of the employee to be reimbursed for money spent for work purposes, or is a running account provided by the employer for expenses related to work. Expenses may be comprised of administrative costs, the costs of office supplies and utilities, or entertaining clients.

Even George Washington had an expense account. During the American Revolution, he preferred to sacrifice his salary and instead used an account for purchases during his military governance. However, the law on expense accounts has since become rather more complicated. Now, expense accounts are considered to be either accountable or unaccountable. When an expense account is accountable, every purchase must be documented and an employee must keep all receipts as the Internal Revenue Service may inspect the account. An employee will be required to return unspent monies in the account to the employer. The Internal Revenue Service provides an extensive guide to expense accounts for employees and employers. The guide clarifies rules regarding travel, meals and entertainment, allowances for cars, advertising, and political contributions, amongst other expenses. It also goes over the tax treatment for these items.

The law on business expenses is complicated. The rules on tax deductions may change— so employers should always check with the appropriate professional. Generally, expenses from business can be deducted from gross income, although it should be remembered that the Internal Revenue Service is not always correct. The chances of mistakes happening are low, but this means that due diligence must be carefully performed. The Internal Revenue Service may wish to check that a business (and by extension, its employees) have not engaged in abuse. If an employee abuses an expense account, a tax claim for business deductions may be exaggerated—and this will increase tax credits. This is why the use of expense accounts should be carefully scrutinized, with supporting receipts. Employee abuse will cause loss to a business. The same is true for self-employed business owners. In Delima v. Commissioner of Internal Revenue, the petitioner claimed expenses for wages, rent and other deductibles. Section 162 (a) (1) U.S. Code § 162 covers trade expenses that are deductible. The court held that a number of her claimed expenses (including for wages, utilities, and maintenance) were not supported by evidence and so did not satisfy the legal requirements for business expenses. An employee can be fired for padding expenses. However, whether they will have to reimburse the employer is less clear.

In 2011, In the Matter of Kristen Jacques, Respondent, a banker at Goldman Sachs was fired for claiming personal expenses on her business credit card in contravention of the Financial Industry Regulatory Authority rules. She was suspended and required to repay the company. While it is possible for an employee to be required to repay the money, the legal situation is vague—and will likely depend upon the industry, the amount and nature of the expenses, and the value that the employee has to the company.

Generally, paper trails will expose dishonest employees. Employers may be aware of signs such as vagueness concerning locations and the appearance of unusual claims for a particular client or business trip. Expense accounts can be tempting prospects for an unscrupulous employee. It is always wise to contact a legal professional (like the lawyers at PCW Law Firm) to ensure all affairs are in order and in compliance with tax law.