As I discussed in a previous blog (Issue #12 June 22, 2007), an AgriPlan Client’s Plan was audited recently by the Internal Revenue Service (IRS). Unfortunately, in this case the judge ruled that insurance premiums and out-of-pocket expenses were not deductible. Why? Because the defendant could not prove that the expenses were incurred by the employee.
In disagreeing with this ruling, TASC replied with a “Motion for Reconsideration,” noting that IRS Regulation 1.105-2 states:
“Amounts paid by an employer on behalf of an employee’s spouse or dependents for medical expenses are considered indirect payments to the employee that are excludable from the employee’s income under IRC Section 105(b) and deductible to the employer as ordinary and necessary business expenses under IRC 162(a).”
The Court’s official reply failed to agree or disagree with the above statement. Rather, the Court countered by stating:
“…even if you are going to use this argument, you failed to show that the employer (the husband) paid, directly or indirectly, to the employee (spouse) the questioned amounts for medical care.”
“…even if you are going to use this argument, you failed to show that the employer (the husband) paid, directly or indirectly, to the employee (spouse) the questioned amounts for medical care.”
Some background information about this case may help us understand the IRS ruling… First, there was one checking account only, a joint account in the name of both husband and wife. Second, all personal and business expense were paid from this account. The husband and wife together paid the expenses. Instead, the husband – as the employer – should have paid the expenses from a business account not shared with the wife.
TASC’s legal council posits that the Court of Appeals might reverse the Tax Court’s earlier determination that medical expenses must be incurred by the employee. Regardless, the end result will be the same, because nothing in the record will contradict the Court’s finding: that the expenses in question were paid by both the husband and his wife.
This case makes it clear…crystal clear. It is absolutely vital that the Client adhere to proper Plan procedures. We did a lot of research before establishing Plan procedures and guidelines. We make sure we understand and stress the various issues that are important to each and every Plan…issues like reasonable compensation, the establishment of a payment schedule, the importance of logging the employee’s hours, and of course, the payment of incurred expenses. Doing so is the only true protection from an audit.
TASC CEO Blog 
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