What should I do if my employee is padding his expense account?
by Charles Swan at www.thevirtualcfo.net
This has to be nipped in the bud. You haven’t mentioned how critical this employee is to the success of the company, so that I will assume that since you are a startup, it is a sensitive position.
You should have a discussion with the employee, and define what is and is not a business expense as far as the company is concerned. If you don’t have one now, it may be a good time to draft an employee manual, or at least a reimbursable expense policy.
Expense reimbursements policies are derived from IRS regulations. IRS requires the expense to be business related. It is the employee’s burden to justify the business purpose. There is an implicit assumption that the reimbursed expenses are business related, and the company is therefore allowed to deduct them as business expenses on its income tax returns. However, if upon audit, the expenses are determined, the deduction by the company can be disallowed, and any reimbursement will be attributed to the employee, with interest and penalties for late payment of related income taxes. If the employee is a significant shareholder, then the treatment can get uglier for the employee/shareholder, as well as the company.
Good luck, and consider that if your employee is cheating on his/her expense reports, what else might they be cheating on?