A few years ago many business owners woke up to discover that the IRS was assessing payroll taxes on the money they had given to their employees (including themselves) for their travel and entertainment expenses. It was quite a surprise. For decades, businesses had given their top employees liberal expense accounts and had required little or no proof that the money was actually spent, let alone spent for a remotely business-related purpose. For many businesses, the expense account was simply a means of rewarding good employees off the payroll.
From a tax standpoint, expense account money was deductible by the business however it was spent. It was a travel or entertainment expense if the employee actually spent the money on the business, or additional compensation to the employee if he didn't spend the money on the business. If there were tax consequences, they were essentially the employee's problems: If he were audited by the IRS, he would have to prove the business purpose of the expenses that he had deducted; otherwise, he would be taxed on the expense account money that he had