revenue procedures irs revenue procedure 2002-41
 
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revenue procedures irs revenue procedure 2002-41

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revenue procedures irs revenue procedure 2002-41

 
IRS Revenue Procedure
2002-41

Code Sec. 62

<<FULL TEXT>>

26 CFR 1.62-2: Reimbursements and other expense allowance arrangements.
(Also Part I, section 62.)


REV. PROC. 2002-41

The purpose of this revenue procedure is to provide an optional expense
substantiation rule so that businesses in the pipeline construction
industry can provide reimbursements under an accountable plan to employees
who also furnish welding rigs or mechanics rigs as part of their
performance of services as employees. This revenue procedure is not
intended to suggest that all workers providing such services and equipment
are employees. Rather, the method in this revenue procedure may be applied
when businesses choose to use an accountable plan to reimburse individuals
who are employees for rig-related expenses incurred as employees.

As part of the Industry Issue Resolution Pilot Program, announced in
Notice 2000-65, representatives of the pipeline construction industry
requested clarification of the proper treatment of amounts paid to
employee welders and heavy equipment mechanics who provide heavy equipment
in connection with the performance of services. At issue was whether the
amounts should be treated as payments of rent, payments of wages, or as
the reimbursement of expenses subject to the accountable plan
requirements.

Employers in the pipeline construction industry encounter several
challenges to reimbursing under an accountable plan the costs relating to
employee-provided welding rigs and mechanics rigs, particularly in
determining the proper amount of the expense incurred. Rig welders and
heavy equipment mechanics work for multiple companies for relatively short
periods. Therefore, the proper allocation of fixed costs related to the
equipment among employers is unclear. Moreover, although the rigs are
mobile, the existing mileage-based expense substantiation provision does
not accurately reflect rig-related costs because rigs are used primarily
while stationary. Further, these employees incur substantial expenses as
employees in providing these rigs as a condition of employment. Due to
these unique features, reimbursing employees for rig-related expenses
under the existing accountable plan requirements is unworkable for this
industry. In order to enable this industry to reimburse rig-related
expenses to employees under an accountable plan, this revenue procedure
provides an optional expense substantiation rule under which rig-related
expenses may be treated as substantiated when reimbursing these expenses
under an accountable plan.

Under this revenue procedure an employer may pay certain welders and
heavy equipment mechanics an amount of up to $13 per hour for rig-related
expenses that is deemed substantiated under an accountable plan when paid
in accord with this revenue procedure (up to $8 per hour if the employer
provides fuel or otherwise reimburses fuel expenses). This revenue
procedure provides for an annual inflation adjustment to these amounts
after 2003, if necessary and is effective for payments made on or after
January 1, 2003. The rules are provided in Questions and Answers below.

The Service recognizes that employers in other industries may similarly
provide payments to employees for the costs of providing equipment as
employees used in the performance of services as employees. To the extent
that the unique features of other industries creates similar challenges to
implementing accountable plans, the Service welcomes comments regarding
the appropriateness and design of similar relief. We specifically request
comments concerning other categories of qualified nonpersonal use vehicles
owned by employees and used by the employees in the course of providing
services as employees, especially where the nature of an industry results
in employees working for multiple employers during each year, for which a
deemed substantiation rule would be appropriate.


TABLE OF CONTENTS

SECTION 1. PURPOSE AND SCOPE
Q-1. Must an employer use this revenue procedure to reimburse
employees for rig-related expenses?
Q-2. What is the tax treatment of amounts deemed substantiated under
this revenue procedure?
Q-3. Which employers may use the deemed substantiation rule provided
in this revenue procedure?
Q-4. For which vehicles and equipment may eligible employers use the
deemed substantiation rule provided in this revenue procedure?

SECTION 2. BACKGROUND
Q-5. What provisions of the tax law apply when an employer reimburses
an employee for employee business expenses?
Q-6. What are the tax consequences to an employee when an employer
reimburses expenses under a nonaccountable plan?
Q-7. What are the tax consequences to an employee when an employer
reimburses expenses under an accountable plan?

SECTION 3. DEEMED SUBSTANTIATION FOR RIG-RELATED EXPENSES
Q-8. What is the amount of rig-related expenses that can be deemed
substantiated under this revenue procedure?
Q-9. For what types of vehicles may rig-related expenses be deemed
substantiated?
Q-10. May expenses be deemed substantiated for pickup trucks under
this revenue procedure?
Q-11. Are welding rigs and mechanics rigs qualified nonpersonal use
vehicles?
Q-12. For which employees may an eligible employer deem rig-related
expenses substantiated under this revenue procedure?
Q-13. Under what circumstances may an eligible employer anticipate
that an employee would incur rig-related expenses while
performing services as an employee for an eligible employer
under the deemed substantiation rule?
Q-14. Will the amount deemed substantiated under this revenue
procedure be adjusted for inflation?
Q-15. May an independent contractor determine deductible expenses
under this revenue procedure?

SECTION 4. EMPLOYEE TREATMENT OF RIG-RELATED EXPENSES

Q-16. May an employee exclude from income amounts reimbursed and
deemed substantiated under this revenue procedure?
Q-17. May an employee claim deductions for rig-related expenses that
exceed amounts reimbursed under an accountable plan or deemed
substantiated under this revenue procedure?
Q-18. May an employee treat payments made under a nonaccountable plan
as if they were made under an accountable plan by voluntarily
substantiating expenses and returning any excess to the
employer?
Q-19. May an employee deduct any rig-related expenses that exceed
those reimbursed by an employer and deemed substantiated under
this revenue procedure on Schedule C, Profit or Loss From
Business?
Q-20. May an employee deduct any rig-related expenses that exceed
those reimbursed by an employer and deemed substantiated under
this revenue procedure on Schedule E, Supplemental Income and
Loss?
Q-21. May an employee deduct expenses that an eligible employer has
already reimbursed under an accountable plan?

SECTION 5. SPECIAL RULES FOR EMPLOYERS
Q-22. May an eligible employer establish an accountable plan to
reimburse rig welders or heavy equipment mechanics for
non-rig-related business expenses?
Q-23. May an eligible employer substitute a rig-related reimbursement
for a portion of wages otherwise payable to an employee?
Q-24. What are the tax consequences if an employer that uses the
deemed substantiation rule in this revenue procedure provides an
additional reimbursement of rig-related expenses?

SECTION 6. EFFECTIVE DATE

SECTION 7. REQUEST FOR COMMENTS

SECTION 8. DRAFTING INFORMATION


SECTION 1. PURPOSE AND SCOPE

Q-1. MUST AN EMPLOYER USE THIS REVENUE PROCEDURE TO REIMBURSE EMPLOYEES
FOR RIG-RELATED EXPENSES?

A-1. No. Use of the rule described in this revenue procedure is not
mandatory, and an employer may, outside the scope of this revenue
procedure, reimburse actual expenses under an arrangement that meets the
accountable plan requirements of section 62(c) of the Internal Revenue
Code (Code) and regulations thereunder. Alternatively, an employer may
reimburse employee business expenses under a non-accountable plan (defined
in Answer 6), or may choose not to reimburse employee business expenses.

Q-2. WHAT IS THE TAX TREATMENT OF AMOUNTS DEEMED SUBSTANTIATED UNDER
THIS REVENUE PROCEDURE?

A-2. If the other requirements described in Answer 5 are satisfied, the
amounts substantiated in accordance with this revenue procedure are
treated as paid under an accountable plan. Thus, the amounts are not
reported as wages on Form W-2 and are exempt from the withholding and
payment of income and employment taxes. Also, no return of information
(e.g., Form 1099) is required for payments made under an accountable plan.
Section 1.6041-3(h)(1).

Q-3. WHICH EMPLOYERS MAY USE THE DEEMED SUBSTANTIATION RULE PROVIDED IN
THIS REVENUE PROCEDURE?

A-3. This substantiation rule may be used by any "eligible employer."
An eligible employer is any employer that hires employee rig welders or
heavy equipment mechanics and requires, as a condition of employment, that
the rig welders and heavy equipment mechanics provide a welding rig or
mechanics rig and use the rig in performing services as an employee
employed in the construction, repair, or maintenance of transportation
mainline pipeline. The business of transportation mainline pipeline
construction or repair includes the construction, maintenance, or repair
of transportation mainline pipeline up to the first metering station or
connection. This includes mainline pipeline whether it transports coal,
gas, water, or other transportable materials, vapors, or liquids. The
first metering station or connection means the point where a valve,
consumer connection, or town border station divides mainline transmission
lines or higher pressure lateral and branch lines from lower pressure
distribution systems.

Q-4. FOR WHICH VEHICLES AND EQUIPMENT MAY ELIGIBLE EMPLOYERS USE THE
DEEMED SUBSTANTIATION RULE PROVIDED IN THIS REVENUE PROCEDURE?

A-4. Eligible employers may use the deemed substantiation rule in this
revenue procedure only to reimburse employees for expenses related to the
use of welding rigs and mechanics rigs described in Answer 9.


SECTION 2. BACKGROUND

Q-5. WHAT PROVISIONS OF THE TAX LAW APPLY WHEN AN EMPLOYER REIMBURSES
AN EMPLOYEE FOR EMPLOYEE BUSINESS EXPENSES?

A-5. The tax rules that apply when an employer reimburses an employee
for employee business expenses depend upon whether the reimbursement is
made under an accountable plan or nonaccountable plan. An accountable plan
is a reimbursement or other expense allowance arrangement that meets three
requirements under section 1.62-2: business connection, substantiation,
and return of amounts in excess of substantiated expenses. The business
connection requirement is satisfied if the arrangement provides advances,
allowances or reimbursements only for business expenses allowable as
deductions under sections 161-198 that are paid or incurred by an employee
(or that the employer reasonably expects the employee to incur) in
connection with the performance of services as an employee. The
substantiation requirement is satisfied if the arrangement requires each
business expense to be substantiated to the employer within a reasonable
period of time. The return of excess requirement is satisfied if the
arrangement requires the employee to return to the payor within a
reasonable period of time any amount paid under the arrangement in excess
of the expenses substantiated. A nonaccountable plan is a reimbursement or
other expenses allowance arrangement that does not satisfy one or more of
the three requirements.

Q-6. WHAT ARE THE TAX CONSEQUENCES TO AN EMPLOYEE WHEN AN EMPLOYER
REIMBURSES EXPENSES UNDER A NONACCOUNTABLE PLAN?

A-6. Generally, section 162(a) allows a deduction for all the ordinary
and necessary expenses paid or incurred during the taxable year in
carrying on any trade or business, including the trade or business of
being an employee. Under section 1.62-2(c)(5), amounts treated as paid
under a nonaccountable plan are included in the employee's gross income,
must be reported as wages on the employee's Form W-2, and are subject to
withholding and payment of income and employment taxes (Federal Insurance
Contributions Act (FICA), Federal Unemployment Tax Act (FUTA), and income
tax withholding). See also Employment Tax Regulations sections
31.3121(a)-3 (FICA); 31.3306(b)-2 (FUTA); 31.3401(a)-4 (income tax
withholding); and Income Tax Regulation section 1.6041-3(h)(1) (return of
information exemption) (for exemption from reporting requirements for
payments made under an accountable plan before January 1, 2001, see
section 1.6041-3(i)(1)). The employee may still deduct the expenses.
However, those deductions may only be claimed as miscellaneous itemized
deductions, which are limited by section 67 to the amount exceeding 2
percent of adjusted gross income.

Q-7. WHAT ARE THE TAX CONSEQUENCES TO AN EMPLOYEE WHEN AN EMPLOYER
REIMBURSES EXPENSES UNDER AN ACCOUNTABLE PLAN?

A-7. Section 1.62-2(c)(4) provides that amounts treated as paid under
an accountable plan are excluded from the employee's gross income, are not
reported as wages or other compensation on the employee's Form W-2, and
are exempt from the withholding and payment of income and employment
taxes.


SECTION 3. DEEMED SUBSTANTIATION FOR RIG-RELATED EXPENSES

Q-8. WHAT IS THE AMOUNT OF RIG-RELATED EXPENSES THAT CAN BE DEEMED
SUBSTANTIATED UNDER THIS REVENUE PROCEDURE?

A-8. If an eligible employer either provides fuel or separately
reimburses fuel expenses, expenses of up to $8 per hour for welding rigs
or mechanics rigs may be deemed substantiated if the other requirements in
this revenue procedure are met. If an eligible employer does not provide
fuel or separately reimburse fuel expenses, rig-related expenses of up to
$13 per hour for welding or mechanics rigs may be deemed substantiated if
the other requirements in this revenue procedure are met.

Q-9. FOR WHAT TYPES OF VEHICLES MAY RIG-RELATED EXPENSES BE DEEMED
SUBSTANTIATED?

A-9. Under this revenue procedure, rig-related expenses may be deemed
substantiated only with respect to welding rigs and mechanics rigs. For
purposes of this revenue procedure, welding rigs are 3/4 ton or heavier
trucks equipped with a welding machine and other necessary equipment, such
as tanks and generators. For purposes of this revenue procedure, mechanics
rigs are heavy trucks equipped with a permanently installed mechanics bed
and other necessary equipment that is used to repair and maintain heavy
machinery on a job site. As explained in Answer 11, mechanics rigs and
welding rigs are qualified nonpersonal use vehicles. The rule in this
revenue procedure is not available for any other vehicles.

Q-10. MAY EXPENSES BE DEEMED SUBSTANTIATED FOR PICKUP TRUCKS UNDER THIS
REVENUE PROCEDURE?

A-10. No. Expenses for pickup trucks may not be deemed substantiated as
rig-related expenses under this revenue procedure unless the pickup truck
is part of a welding rig as described in Answer 9. (See Rev. Proc. 2001-54
for rules under which the amount of ordinary and necessary expenses of
local travel or transportation incurred by an employee will be deemed
substantiated under section 1.274-5 when an employer provides a mileage
allowance under an accountable plan.)

Q-11. ARE WELDING RIGS AND MECHANICS RIGS QUALIFIED NONPERSONAL USE
VEHICLES?

A-11. Under the authority of section 1.274-5T(k)(2)(ii)(S), the
Commissioner, solely for purposes of applying the deemed substantiation
rule in this revenue procedure, designates the welding rigs and mechanics
rigs as described in Answer 9 as qualified nonpersonal use vehicles.

Q-12. FOR WHICH EMPLOYEES MAY AN ELIGIBLE EMPLOYER DEEM RIG-RELATED
EXPENSES SUBSTANTIATED UNDER THIS REVENUE PROCEDURE?

A-12. An eligible employer may deem rig-related expenses substantiated
only for employee rig welders and heavy equipment mechanics who are
required, as a condition of employment, to provide a welding or mechanics
rig for use in providing personal services as an employee.

Q-13. UNDER WHAT CIRCUMSTANCES MAY AN ELIGIBLE EMPLOYER ANTICIPATE THAT
AN EMPLOYEE WOULD INCUR RIG-RELATED EXPENSES WHILE PERFORMING SERVICES AS
AN EMPLOYEE FOR AN ELIGIBLE EMPLOYER UNDER THE DEEMED SUBSTANTIATION RULE?

A-13. An eligible employer's reimbursement will meet the business
connection requirement of section 1.62-2(d) if the eligible employer
reasonably anticipates that the employee will incur rig-related expenses
in connection with the performance of services for the employer. It would
not be reasonable for an eligible employer to anticipate that an employee
would incur rig-related expenses for hours that it actually knew the
employee's rig was not used (such as during a work stoppage for inclement
weather).

Q-14. WILL THE AMOUNT DEEMED SUBSTANTIATED UNDER THIS REVENUE PROCEDURE
BE ADJUSTED FOR INFLATION?

A-14. Yes. For calendar years after 2003, the hourly rate will be
adjusted annually for inflation under section 1(f)(3), except that the
base year for such adjustment will be calendar year 2002 and no adjustment
will be made unless the increase is at least one dollar. Any adjustment
will be rounded to the nearest dollar. Any adjustment to the rates
provided in this revenue procedure will be published annually.

Q-15. MAY AN INDEPENDENT CONTRACTOR DETERMINE DEDUCTIBLE EXPENSES UNDER
THIS REVENUE PROCEDURE?

A-15. No. Independent contractors engaged in the trade or business of
providing welding services or services as heavy equipment mechanics may
not use the deemed substantiation method in this revenue procedure to
determine deductible expenses in their trade or business.


SECTION 4. EMPLOYEE TREATMENT OF RIG-RELATED EXPENSES

Q-16. MAY AN EMPLOYEE EXCLUDE FROM INCOME AMOUNTS REIMBURSED AND DEEMED
SUBSTANTIATED UNDER THIS REVENUE PROCEDURE?

A-16. Yes. This is true even if the amounts reimbursed and deemed
substantiated exceed the actual rig-related expenses. For example, assume
an employee incurs $20,000 in rig-related expenses, and the employer
reimburses $20,800 at the $13 per hour rate for welding rigs provided
under this revenue procedure. Because the reimbursement was paid under an
accountable plan, the entire reimbursement is excluded from the employee's
income.

Q-17. MAY AN EMPLOYEE CLAIM DEDUCTIONS FOR RIG-RELATED EXPENSES THAT
EXCEED AMOUNTS REIMBURSED UNDER AN ACCOUNTABLE PLAN OR DEEMED
SUBSTANTIATED UNDER THIS REVENUE PROCEDURE?

A-17. Yes. To the extent employee business expenses exceed those
reimbursed under an accountable plan, they may be claimed as miscellaneous
itemized deductions on Schedule A. To do this, the employee must report
all reimbursed amounts, including those deemed substantiated, and must
offset expenses on Form 2106.

Q-18. MAY AN EMPLOYEE TREAT PAYMENTS MADE UNDER A NONACCOUNTABLE PLAN
AS IF THEY WERE MADE UNDER AN ACCOUNTABLE PLAN BY VOLUNTARILY
SUBSTANTIATING EXPENSES AND RETURNING ANY EXCESS TO THE EMPLOYER?

A-18. No. An employee cannot create an accountable plan. Under section
1.62-2(c)(3), if an employer provides a nonaccountable plan, an employee
who receives payments under the plan cannot compel the employer to treat
the payments as paid under an accountable plan by voluntarily
substantiating the expenses or returning any excess to the employer.

Q-19. MAY AN EMPLOYEE DEDUCT ANY RIG-RELATED EXPENSES THAT EXCEED THOSE
REIMBURSED BY AN EMPLOYER AND DEEMED SUBSTANTIATED UNDER THIS REVENUE
PROCEDURE ON SCHEDULE C, PROFIT OR LOSS FROM BUSINESS?

A-19. No. Expenses incurred in connection with the trade or business of
being an employee may not be deducted on Schedule C.

Q-20. MAY AN EMPLOYEE DEDUCT ANY RIG-RELATED EXPENSES THAT EXCEED THOSE
REIMBURSED BY AN EMPLOYER AND DEEMED SUBSTANTIATED UNDER THIS REVENUE
PROCEDURE ON SCHEDULE E, SUPPLEMENTAL INCOME AND LOSS?

A-20. No. Expenses incurred in connection with the trade or business of
being an employee may not be deducted on Schedule E.

Q-21. MAY AN EMPLOYEE DEDUCT EXPENSES THAT AN ELIGIBLE EMPLOYER HAS
ALREADY REIMBURSED UNDER AN ACCOUNTABLE PLAN?

A-21. No.


SECTION 5. SPECIAL RULES FOR EMPLOYERS

Q-22. MAY AN ELIGIBLE EMPLOYER ESTABLISH AN ACCOUNTABLE PLAN TO
REIMBURSE RIG WELDERS OR HEAVY EQUIPMENT MECHANICS FOR NON-RIG-RELATED
BUSINESS EXPENSES?

A-22. Yes. An employer may establish a separate accountable plan to
reimburse non-rig-related employee business expenses incurred by rig
welders or heavy equipment mechanics in addition to the arrangement
provided under this revenue procedure. For example, Rev. Proc. 2001-47
provides rules under which an employer may establish an accountable plan
for which the amount of ordinary and necessary business expenses of an
employee for lodging, meal, and incidental expenses or for meal and
incidental expenses incurred while traveling away from home will be deemed
substantiated under section 1.274-54.

Q-23. MAY AN ELIGIBLE EMPLOYER SUBSTITUTE A RIG-RELATED REIMBURSEMENT
FOR A PORTION OF WAGES OTHERWISE PAYABLE TO AN EMPLOYEE?

A-23. This revenue procedure is not intended to permit the
recharacterization of wages otherwise payable to an employee. For example,
if an employer normally pays an employee $35 per hour in wages and does
not provide a rig reimbursement in the event of inclement weather, the
employer may not recharacterize a portion of the $35 hourly wage into rig
reimbursement during inclement weather. If an employer's reimbursement or
other expenses allowance arrangement evidences a pattern of abuse of the
accountable plan rules, then all payments made under the arrangement will
be treated as paid under a nonaccountable plan.

Q-24. WHAT ARE THE TAX CONSEQUENCES IF AN EMPLOYER THAT USES THE DEEMED
SUBSTANTIATION RULE IN THIS REVENUE PROCEDURE PROVIDES AN ADDITIONAL
REIMBURSEMENT OF RIG-RELATED EXPENSES?

A-24. If an employer that uses the deemed substantiation rule
separately reimburses an employee for any rig-related expenses, the
additional payment is treated as paid under a nonaccountable plan. Thus,
the additional payment is reported as wages or other compensation of the
employee's Form W-2, and is subject to withholding and payment of income
and employment taxes.

For example, employee A is reimbursed for rig-related expenses deemed
substantiated under this revenue procedure, and A incurs expenses for
cleaning the rig and an oil change. The employer pays employee A an
additional $25 per week to cover cleaning and the oil change. Because the
employer also pays a rig reimbursement under this revenue procedure, the
$25 paid by the employer is treated as paid under a nonaccountable plan.
Thus, the additional payment is reported as wages or other compensation of
the employee's Form W-2, and is subject to withholding and payment of
income and employment taxes.


SECTION 6. EFFECTIVE DATE

This revenue procedure is effective for payments made on or after
January 1, 2003.


SECTION 7. REQUEST FOR COMMENTS

We welcome comments regarding this revenue procedure. We specifically
request comments concerning other categories of qualified nonpersonal use
vehicles owned by employees and used by the employees in the course of
providing services as employees, especially where the nature of an
industry results in employees working for multiple employers during each
year, for which a deemed substantiation rule would be appropriate.
Comments regarding this revenue procedure should be sent by September 9,
2002 in writing, and should reference Rev. Proc. 2002-41.

Comments can be addressed to:

CC:ITA:RU (Rev. Proc. 2002-41), room 5226
Internal Revenue Service
POB 7604, Ben Franklin Station
Washington, DC 20044


Comments also may be hand delivered between the hours of 8 a.m. and 5
p.m. to:

CC:ITA:RU (Rev. Proc. 2002-41) Courier's Desk
Internal Revenue Service
1111 Constitution Avenue, NW
Washington, DC.


Alternatively, taxpayers may transmit comments electronically via the
following e-mail address:

Notice.Comments@irscounsel.treas.gov


SECTION 8. DRAFTING INFORMATION

The principal author of this revenue procedure is Joe Spires of the
Office of the Division Counsel/Associate Chief Counsel (Tax Exempt and
Government Entities), IRS. However, other personnel from the IRS and
Treasury Department participated in its development. For further
information regarding this revenue procedure, call Mr. Spires at (202)
622-6040 (not a toll-free number).

<<END RULING>>



 

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