An IRS regulation as a catalyst for change? How Berkeley reduced red tape for mileage reimbursements.
Prior to the change in regulations, employers were required to calculate mileage reimbursement based on a formula in which the top reimbursement rate of 26 cents per mile applied only to the first 15,000 business miles per year, and 11 cents applied to all miles over 15,000. Effective July 1, 1990, the IRS collapsed the rate structure creating one standard reimbursement rate of 26 cents per mile regardless of miles driven; however, if the employer allowed a rate higher than 26 cents, the difference had to be reported to the IRS as additional income and was subject to income taxation.
Berkeley's Pre-1990 Policy
Berkeley, a city of 103,000 people, has 1,344 full-time and 71 part-time employees. To integrate the IRS' new regulation into the already cumbersome reimbursement system in Berkeley would have required costly and time-consuming procedures. The existing system had been established to feed a 1970s, semicomputerized accounting system, ensure internal controls and maintain an audit trail, especially for grants accounting.
The negotiated union contracts of the City of Berkeley include a reimbursement rate for mileage of 34 cents, a rate that is used for all staff. A costly, paper-intensive and mostly manual system had to be maintained to reimburse employees for their mileage, and employees complained frequently about the length of time it took to receive a reimbursement check. The reimbursement system required the following steps.
Step 1. Employees receive authorization to use their private vehicles by completing an "Auto Allowance Application" form which requires proof of valid driver's license and proof of financial responsibility (insurance). A department head and the city manager certify the form.
Step 2. Employees fill out an "Application for Use of a Privately Owned Vehicle for City Business" form which explains city regulations about car use. The immediate supervisor and department head must sign to approve.
Step 3. Employees make an entry on the "Daily Auto Record for Auto Allowance" form, providing origin and destination of trips, miles driven and various other information (tolls, parking).
Step 4. Supervisors sign the "Daily Auto Record" forms and submit them monthly to the accounting office.
Step 5. The accounting office prepares a "Special Payment Form" for all employees due auto allowance reimbursements. The preparer and an authorized second signatory sign this form.
Step 6. The accounting office prepares a voucher requesting checks for each employee listed on the "Special Payment Form." An authorized person signs this voucher.
Step 7. Staff bring these documents to the auditor's office for pre-audit. This review determines whether employees have valid auto allowance authorizations on file and ascertains the propriety of the reimbursement. Staff in the auditor's office keep a log of auto payments by department.
Step 8. The approved documents are delivered to the finance department for check issuance.
Step 9. Before issuing checks, finance department staff post the names of employees receiving checks on control cards.
Step 10. Finance staff enter the payment data into the computer and checks are printed.
Step 11. Finance staff send checks to the employees in interoffice mail.
Step 12. Vouchers and back-up documentation is filed.
To comply with the IRS regulation, the city auditor asked the payroll audit manager and information systems auditor to evaluate the feasibility of paying the reimbursements through the payroll system. The objectives were to reduce paperwork, cut costs and expedite payments.
Analysis. Of the estimated 70 employees who received auto allowance each year, approximately 50 were regular monthly recipients of payments. Their total annual reimbursement was about $32,000. The additional 20 employees received minimal reimbursements which did not affect their taxable income.
To estimate the tax liability, the auditors based their tax calculations on the total reimbursement of $32,000. After deducting 5 percent for bridge tolls and parking, they calculated that, at 34 cents per mile, employees drove approximately 90,000 miles per year. The IRS' allowed rate of 26 cents and the city's 34 cent rate resulted in a taxable difference of eight cents; therefore, the reportable and taxable income was approximately $7,000. Using a 20 percent flat tax rate, the total withholding would be $1,400 for 50 employees, or about $28 per individual per year.
The cost to administer the existing reimbursement system, prior to the IRS 1990 requirement, was conservatively estimated at about $10,000 a year. Integrating the new requirement into the manual system would most likely double that cost.
New Proposal. When the auditors recommended that the information systems department develop and integrate a new program into the payroll system, the staff created a program that computes mileage, parking and toll reimbursements and allows monthly payment through the employees' paychecks.
The new program includes two new labor codes: mileage and miscellaneous mileage related expenses. Under the mileage code, the total miles for the month are entered. Under the miscellaneous mileage expense code, the total dollar amount of parking and tolls is entered. Both codes are written on employee timecards, which are used as input documents.
On the payroll edit report, the taxable (eight cents/mile x total miles driven = total dollars) and nontaxable (26 cents/mile x total miles driven = total dollars) dollar amounts appear as separate entries. This allows integration into the W-2 forms system at the end of the calendar year.
The following forms continued to be necessary to provide safeguards, to maintain an audit trail and for data entry. 1) "Application for Use of Privately Owned Vehicle for City Business," to provide the legal and insurance safeguards needed by the city, 2) "Daily Auto Record for Auto Allowance," providing date to maintain an audit trail and 3) the mileage and miscellaneous expenses section of the timecard for the data input document.
Under the new system, departmental payroll staff keep both the copy of the private car use authorization form and the monthly record of miles driven. They maintain authorizations current and retain source documents on miles driven. By the sixth working day of each month, employees must present their "Daily Auto Record for Auto Allowance" forms from the previous month. If they do not, mileage is not reimbursed until the following month.
The city manager accepted all of the auditors' recommendations, and the system went into effect in 1990. The new, threestep mileage reimbursement system has replaced the 12-step process used before the IRS' 1990 regulation.
Step 1. Authorization to use a private automobile (no change).
Step 2. Completion and authorization of the monthly record of miles driven (no change).
Step 3. Posting miles and miscellaneous expenses on the timecard which is signed by both the employee and supervisor (new).
The benefits of this abbreviated system are numerous. Red tape is reduced while a high level of accountability is maintained, the goal of productivity savings and cost avoidance has been accomplished, and employees receive their reimbursements quickly. The 11-page administrative regulation on the use of private autos has been reduced to three pages, including appendices, and three forms have been eliminated. Administrative regulations have been modified to reflect the new procedures. Most importantly, no loss of accountability was incurred. Time spent, especially by accounting staff to fill out forms and vouchers, can be put to more productive uses. The maintenance costs of a manual system was avoided and one-time computerization costs were incurred.
Employees who submit their monthly reimbursement requests in a timely manner, receive reimbursements in their paychecks each month, and their W-2 forms reflect their additional income and taxes due. When the auditors reviewed related administrative regulations, they discovered that the regulation on policies and payments for conference and meeting attendance included a reimbursement provision which required minor modifications. Changes were made, allowing more mileage reimbursements to be handled through the payroll system. Staff are currently evaluating the feasibility of paying other travel reimbursements through the payroll system, and additional streamlining may result.
The only efficient way to comply with the new IRS requirement for reporting and taxing the difference in mileage reimbursement, was through the payroll system, an approach that brought the City of Berkeley a reduction of red tape, productivity savings, cost avoidance and faster payments to employees. City staff found an IRS regulation to be a catalyst for cutting red tape--to improve a cumbersome and labor-intensive system--and they went on to seek out other opportunities for system improvement. When opportunities knocked, they opened the door and, with flexibility and creativity, welcomed it in.
ANNA RABKIN, the elected city auditor for Berkeley, California, is a member of GFOA and the National Association of Local Government Auditors. Having a graduate degree in city and regional planning with an emphasis on program evaluation, she has increasingly focused on operational audits aimed at improving efficiency and effectiveness.
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|Title Annotation:||State of the Art|
|Publication:||Government Finance Review|
|Date:||Dec 1, 1992|
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