Running Head: RESPONSE MEMO 1
Response Memo to the IRS
RESPONSE MEMO 2
To: The Internal Revenue Service (IRS)
From: Accountant of XYZ, Inc
Subject: Appeal of NOPA relating to Per Diem provided to the employees
Issue:
• The main issue that has been identified is related to the disallowance of 50 % of the
deduction claimed for per diem expenses by the IRS by mischaracterizing half of the
deduction as Meals and Incidental Expenses.
• Another issue that has also been identified is that the Notice of Proposed Adjustment
(NOPA) contains an irrelevant code section that is applicable to individuals and not
business entities or corporations.
Conclusion:
The XYZ, Inc business has made the decision to appeal the NOPA that has been issued
by the IRS and submit a full protest. The application of § 274 (n) is relevant in the context
since it can help in reducing the tax liability by allocating 40 % of $ 10,000,000 to the Meals
and Incidental Expenses category. By doing so, it will be possible to reduce the disallowed
deduction that has been proposed by the Internal Revenue Service. The amount can be reduced
from $ 5,000,000 to $ 2,000,000, and the tax liability of the business can be reduced from $
1,750,000 to $ 7,00,000 at the corporate tax rate of 35 %.
The company can provide substantial pieces of evidence for supporting the claim that
the meals and incidental expenses were lower than the threshold of 40 %. By taking such an
action, the tax liability of the business entity can get reduced since it will imply that a majority
of the expenses that have been borne are related to lodging expenses.
Facts:
The Internal Revenue Service has not disputed XYZ, Inc’s claim of $ 10,000,000
pertaining to travel-related expenses. However, the IRS has limited the deduction amount by
RESPONSE MEMO 3
50 %. The main reason for the restriction is the absence of substantiation of the expenses that
are required by IRC § 162, IRC § 212, and IRC § 274 (Internal Revenue Service, n.d.). In the
previous years, the business entity has filed tax returns in a similar manner by combing the per
diem elements relating to meals and incidental expenses, and lodging expenses and by
applying a 100 % deduction.
The company has always followed the relevant guidelines and applied the General
Services Administration (GSA) rates relating to employee reimbursement for travel, meals,
and incidentals. The per diem allowance of the business meets the specifications and
requirements of the accountable plan, and it fulfills the regulations § 62 (c) along with
Treasury Regulation § 1.62 – 2. c
Laws and Analysis:
In the NOPA, the IRS has cited three distinctive codes, including IRC § 162, IRC §
212, and IRC § 274, for justifying its issuance. IRC § 162 focuses on the deduction of
expenses that have been incurred during business-related travel and it encompasses the
expenses relating to meals and lodging (Internal Revenue Service, n.d.). Revenue Rulings 75-
170 and 73-529 have defined terms such as overnight requirements as well as individual’s tax
home. The deduction claim that has been made by XYZ, Inc per diem and travel expenses,
which encompass lodging- and meals-related expenses that have been incurred by the
employees for traveling on business and staying away from their individual tax home. The $
10,000,000 amount satisfies the requirements that have been laid down by the IRC Code and
Revenue Rulings in connection to overnight requirements and individual’s tax home. c
As per IRC § 212, the deductions of expenses pertaining to the generation of income
are allowed. Furthermore, Treasury Regulation § 1.62 – 2 has stated that it does not intend to
disallow the expenses that would otherwise be considered allowable under IRC § 162.
Although the NOPA that has been issued addresses the IRC § 212 component, the specific
RESPONSE MEMO 4
section is applicable to itemized deductions that have been made by individuals (Legal
Information Institute, n.d.), and hence, it is not applicable in the case of XYZ, Inc which is a
corporation.
On the basis of IRC § 274 (n), the deduction relating to meals and beverages is limited
to 50 %. Moreover, as per the section, entertainment expenses are not deductible. In case the
per diem rate that has been set by an employer is lower than the federal rate, the business can
deduct the amount, which is equivalent to a 40 % per diem allowance as meals and incidental
expenses. It is then subjected to a 50 % deduction.
The travel expenses that have been claimed by the business entity have not been
disputed by the IRS in the NOPA. But the $ 10,000,000 amount has been limited, and the IRS
has only allowed 590 % of the amount, i.e., $ 5,000,000. Since the business entity has used an
accountable plan and the per diem rate that has been applied is the rate that has been
introduced by the federal government on a per locality basis, a 40 % allowance on the amount
of $ 10,000,000 can be considered to be fairly reasonable. At the maximum, the amount that is
disallowed by the Internal Revenue Service should not exceed $ 2,000,000, which is much less
than what has been ascertained in the NOPA.
The company is confident that it can present relevant pieces of evidence in order to
substantiate the expenses. The business can also prove that the expenses that have been
incurred relating to meals and incidental expenses are much lower than the $ 4,000,000
threshold, which has been arrived at by considering 40 % of $ 10,000,000. Since the company
has a fair case in hand, it has made the decision to appeal the NOPA and justify the deduction
amount that has been claimed by it. By abiding by the applicable codes and using the
evidence, the XYZ, Inc business can put forward its case so that it can claim the entire
deduction value in a just, legal, and fair manner.
The contents of the memo are highly confidential in nature. c
RESPONSE MEMO 5
Thank you
Reference
§1.901–2 26 CFR ch. I (4–1–22 edition) - govinfo. Internal Revenue Service. (n.d.).
https://www.govinfo.gov/content/pkg/CFR-2022-title26-vol11/pdf/CFR-2022-title26-
vol11-sec1-901-2.pdf
Legal Information Institute. (n.d.). 26 U.S. Code § 212 - expenses for production of income.
Legal Information Institute. https://www.law.cornell.edu/uscode/text/26/212
Publication 535 (2022), business expenses. Internal Revenue Service. (n.d.).
https://www.irs.gov/publications/p535
