Tax Court Sends Reminder of Documentation Rules
In a recently released decision, the Tax Court has reminded us of the importance of adequately documenting business expenses for mileage, travel and meals. In Marcus O. Crawford, TC Memo 2014-156, the Court upheld the disallowance of Mr. Crawford’s business expenses for mileage, travel and meals due to inadequate documentation of the business purpose. While the ruling deals with deductions claimed on Mr. Crawford's tax return, its theory applies to all documentation for these common expenses incurred by any church or nonprofit.
Mr. Crawford operated a side business in addition to being a full time employee for another company. The disallowed deductions related to his side business and were claimed on his Schedule C. To support his deductions for mileage, meals and other travel expenses, Mr. Crawford provided his calendar with various notations as to places, names, activities or miles. For his meals and entertainment expenses, he presented a spreadsheet indicating the place, the date, the amount and the business purpose. (Sounds pretty good so far, right?) However, the IRS was not satisfied with the documentation and disallowed the expenses. The Court and the IRS agreed on the following deficiencies:
- Documentation inaccurate: Mr. Crawford's calendar proved to be inaccurate. Entries on the calendar were in conflict with other independent documentation. Since some of the entries were determined to be inaccurate, it was determined that none of the entries were reliable.
- Documentation vague or ambiguous: Even if the calendar notations had been deemed reliable, the notations were determined to be too vague or ambiguous to support the business purposes. The mileage entries did not clearly indicate the business purpose. The Court refused to assume that the mileage notations were automatically associated with the business activities. Other notations just listed someone's name with no other information to support the business activities.
- What was paid: Invoices and confirmation print outs were presented to document travel expenses. However, the Court could not determine if Mr. Crawford had paid for the expenses or if his employer had paid for the expenses or what were final expense amounts. Once again challenging Mr. Crawford’s credibility, the IRS determined that some of the invoices had been paid for with a credit card that was reimbursed by Mr. Crawford’s employer.
- Lack of notated business purpose: For receipts that were deemed credible, there was no business purpose noted on the receipt to clearly indicate the business purpose of the trip.
- Business purpose too generic: The spreadsheet presented to support the meal and entertainment expenses contained most of the required elements. However, the business purpose was consistently listed as “interview/team training”. Since some of the meals were only for Mr. Crawford, the documentation was suspect. For those involving other people, the spreadsheet did not contain adequate documentation as to who was involved and the business relationship.
In reviewing the Crawford case, I felt a certain déjà vu. As a part of our IRS Compliance Reviews, we review expense reports as well as the documentation of a church/nonprofit organization’s credit card expenses. We consistently find weaknesses in the documentation of these types of expenses. Some of the weaknesses align with the Crawford case. Consider the following:
- Documentation vague, ambiguous or generic: Use of the word “ministry” as the business purpose is not a sufficient business purpose and is as insufficient as Mr. Crawford’s “interview/team training”. Another common one for churches is “hospitals” without any detail as to where the staff member actually traveled.
- Question as to what was paid: Reservation confirmations are not always proof of an expenses. Additionally, clarification of who has paid for an expense is vital to the reimbursement process. Care needs to be taken to determine the actual payer of an expense prior to reimbursement by the church/organization and to reimburse for the final expense amount. While normally not intentional, I have seen instances of expenses reimbursed that were originally charged on a corporate credit card. It is always a good practice to request original receipts be turned in for any reimbursement or for any credit card charge.
- Lack of any business purpose: In regards to meals, just listing who was at the meal does not fulfill the documentation requirements. The business connection of the person must be clearly established as well as the business purpose for the meal.
- Conflicting or unclear documentation: It was determined that Mr. Crawford was reimbursed by his employer for some of the expenses that he claimed on his Schedule C. If a minister or other staff member is involved with a business or ministry outside the church, it is important to be able to determine the correct business associated with an expense. While the church or organization may gain an intangible benefit from a person's outside activities, it does not create a justification for the payment of the expenses of the outside business.
Over time it is easy to fall into sloppy documentation habits. Leaders of nonprofit organizations have many competing demands for their time and spending time documenting business expenses is tedious. However, proper documentation of expenses is not only required by the tax law, it is critical to avoiding other undesirable consequences. This is especially true of these three common expense areas. In a separate blog post, we will review the consequences of poor expense documentation habits to both an organization and to the individuals involved. In the meantime, it is time to review your organization's accountable expense reimbursement plan not only as it is written, but also as it is executed.