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IRS takes closer look at fringe benefits in company audits

| Sep 3, 2014 | Tax Controversies

Technology employers have been known to offer the benefit of free meals to encourage collaboration and also longer hours. While not all employers go to the extent of free meals, most do offer coffee, tea and the occasional gift card as perks to improve performance.

During some routine company tax audits, the IRS has looked closer at free meals, according to a Wall Street Journal article. If an employer does not withhold taxes to cover the meals, the agency can seek back taxes amounting to as much as 30 percent the fair market value of the meals.

The Internal Revenue Service and U.S. Treasury Department are placing new focus on “employer-provided meals” for the current fiscal year. The agency plans to offer more guidance, but as some employers challenge the IRS the tax controversy may be decided in court.

Generally, employer-provided meals above and beyond those offered at an occasional business meeting are taxable fringe benefits. They are similar to an employer-paid life insurance policy, which is taxable above the $50,000 IRS threshold.

While the IRS could go after the employee who receives the free meals for back taxes, the agency usually tries to collect from the employer who failed to withhold the taxes.

The taxability of free meals is a complex area of tax law. For example, an exception exists for meals served for a “noncompensatory” purpose for the “convenience of the employer.” A Las Vegas casino won the argument that meals were not taxable, because it had such strict security it was not practical for employees to eat offsite. An experienced taxation attorney can provide additional guidance on the taxability of a corporate or small business fringe benefit.

Source: Wall Street Journal, “Silicon Valley Cafeterias Whet Appetite of IRS,” Mark Maremont, September 1, 2014.

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