Here are some recent interesting IRS tax court cases related to a staffing company, captive insurance and employee reimbursements. Even though IRS audits typically don't go beyond six years after the tax returns are filed, but IRS has no such time limit if the tax return is not filed or filed fraudulently.
a.) ESOP plans for the owners (Staffing Services, Inc., Tax Court Docket 6881-12R): In this case an executive was the sole participant in an ESOP that owned a company. The same individual also owned another corporation that had many employees. The Court decided that the ESOP isn’t qualified since the plan fails the minimum coverage rules because the two companies, which are related through the executive’s ownership, are combined for testing purposes, and the ESOP covers less than 70% of the workforce of both corporations.
b.) Reimbursements (Per-Diem) Paid to Employees (Johnson, TC Summ. Op. 2017-71): Reimbursements paid to employees under a non-accountable plan are taxable, as a taxpayer learned the hard way in this case. His W-2 wages showed $42,000 for per diem travel allowances, and he took a deduction for most of that amount as un-reimbursed employee business expenses. IRS noted that the employer’s reimbursement arrangement wasn’t an accountable plan because reimbursements were paid regardless of whether the employee incurred the cost or could properly substantiate the expenses.
c.) Small captive insurance (Avrahami, 149 TC No. 7): A couple who owned shopping centers and jewelry stores took an income tax write-off for property and casualty insurance premiums paid to a newly formed small Caribbean insurance firm that was owned by the wife. The insurer had no other customers. No claims were ever made on the policies. The Tax Court decided that the transactions didn’t constitute insurance because there was no risk shifting or risk distribution, disallowed the premium deduction.
IRS reminds taxpayers,“These schemes can end up costing taxpayers more in back taxes, penalties, and interest than they saved in the first place.” I would like to emphasize that each person's situation is different so it's important to fully consider your specific situation before deciding what sort of expenses you can claim.