Running Head: Accounting Policy 1
Recommendation for a New Per Diem Accounting Policy
Accounting Policy 2
The CPA Co.
XYZ Street
New Hampshire
August 12, 2023
ABC Inc.
XYZ Street
New Hampshire
Dear Sir/ Madam,
Introduction
The letter has been written since the ABC Inc. business has recently received a Notice of
Proposed Adjustment (NOPA) from the Internal Revenue Service. The NOPA is related to a
$ 10 million deduction that was made relating to per diem expenses involving lodging,
meals, and entertainment. The purpose of the letter is to recommend a new per diem
accounting policy so that in the future, similar situations will not arise.
Steps for researching the per diem issue
For conducting a thorough research relating to the per diem issue, a broad range of resources
were used, including the Internal Revenue Code (IRC), IRC’s Treasury regulations,
including revenue ruling and revenue procedure, Internal Revenue Service publications and
other relevant documents. The thorough analysis has helped to examine the current laws that
are applicable in the situation and the compliances that must be made so that no complexity
will arise while handling transactions relating to per diem.
Facts from client’s situation
In the specific context involving the business, IRS presented the argument that the business
lacked sufficient substantiation, as a result of which only 50 % of the deduction was
applicable. The fundamental reason for making the recommendation regarding a new per
Accounting Policy 3
diem policy is to ensure that the company prioritizes sufficient substantiation pertaining to
the lodging expenses of the staff members. The current policy does not emphasize
substantiation, due to which it is challenging for the business to ascertain the total expenses
relating to the meals and lodging of the staff members. For successfully making the appeal,
the business has to ensure that sufficient substantiation is in place to justify the $ 10 million
deduction.
Relevant federal tax laws and regulations and GAAP
The following laws and regulations ate applicable in the business context:
• IRC § 162 – As per IRC § 162 (a), deductions are allowed for essential travel or
business expenses.
• IRC § 274 (d) – It states that deductions are disallowed in case the expenses cannot
be substantiated in terms of amount, time, and place.
• IRC § 274 (n) – As per the tax code, only 50 % of expenses that are paid for food
and beverages can be deducted apart from expenses that are highlighted in 2, 3,4, 7,8
and 9 of (e) paragraph.
• CFR § 1.274-5 (c) (2) (iii) (A) – The code captures all documentary evidence that is
required for substantiating travel expenses over $ 75 of the employees.
• CFR § 1.274-5 (f) (4) (i) – The code focuses on adequate accounts, including diary,
account books, logs, etc.
• CFR § 1.274-5 (j) (1) – The commissioner may provide appropriate methods and
rules for paying for meal expenses that are incurred while travelling by employees for
business purposes (Internal Revenue Service, n.d).
Analysis
On the basis of the laws and regulations that have been listed above, it is recommended that
the new policy must be aligned with IRC § 274 and CFR § 1.274-5. It is clearly highlighted
Accounting Policy 4
in IRC § 274 that travel expenses need to be substantiated for deduction purposes (Internal
Revenue Service, n.d.). So, the business must ensure appropriate evidence is collected for
substantiating them. CFR § 1.274-5 has also been considered since it mainly focuses on the
evidence that needs to be collected by employees for substantiation purposes. The laws that
have been presented are of relevance since it is mentioned that expenses relating to meals
cannot be substantiated. In the business context, all travel expenses must be substantiated to
strengthen the appeal against the NOPA.
Recommended new per diem policy
The following policy recommendations have been made for the business:
• A mandatory policy must be introduced to maintain travel records of employees
pertaining to business trips. A number of details need to be captured in the records,
including the trip date, duration, expenses incurred, justification of the expenses, and
the association between the employer and the individual who receives the money.
• A copy of the credit card statement must be attached to the travel report. The purpose
of the statement is to show details such as the name, amount, and place where an
expense was incurred.
• A stringent policy must be introduced and implemented within the organization so
that all the organizational personnel would record the information that would have to
be used as evidence. A specific time duration has to be set for the employees after
every trip, within which they can complete their travel records.
• An internal control system must be introduced to monitor the travel records.
Yours sincerely
John Doe
Accounting Policy 5
Reference
Expenses for business meals under - Internal Revenue Service. (n.d.).
https://www.irs.gov/pub/irs-drop/n-18-76.pdf
Tax code, regulations, and Official Guidance. Internal Revenue Service. (n.d.).
https://www.irs.gov/privacy-disclosure/tax-code-regulations-and-official-guidance
