On April 28, 2023, the Internal Revenue Service’s (IRS) Office of Chief Counsel underscored the importance of adherence to claims substantiation rules for health flexible spending arrangements (health FSAs) under Internal Revenue Code Section 125. The guidance also expressed disapproval of certain substantiation practices that have gradually become commonplace. This development was reported by law firm Ogletree, Deakins, Nash, Smoak and Stewart.
Their report offers a clearer understanding of the IRS’ stance on these issues. The IRS’ guidance serves as a reminder to corporations and law firms alike about the importance of robust substantiation of health FSAs and Dependent Care Assistance Programs (DCAPs).
These requirements are not newly established; rather, they clarify the IRS’ expectation of strict adherence to the existing rules. Neglecting these rules can lead to complications during audit procedures and can result in penalties.
The mentioned dubious practices include estimating or rounding up expenses without accurate receipts, accepting Explanation of Benefits (EOBs) as sole substantiation, and approving over-the-counter medicines without a prescription based on card swipe data.
The IRS’ enforcement approach focuses on the rule that all FSA and DCAP expenses must be substantiated. While it acknowledges some expense substantiation through debit cards linked to health FSA or DCAP accounts, the IRS insists on supporting documentation for all such expenses.
The cautionary tale here is to ensure ample documentation and careful adherence to the IRS substantiation requirements for both health FSAs and DCAPs. Law firms and corporations need to maintain a keen eye on their substantiation practices to avoid falling afoul of IRS rules and regulations.
In conclusion, it’s crucial for companies and legal firms to stay updated on regulatory guidance such as this and maintain robust practices for claims substantiation. Any perceived leniency in compliance could invite unwanted scrutiny and potential penalties.