IRS Notice 2011-72: Accountable Plans and Mileage Reimbursement

An employer can reimburse you for business driving tax-free only if the payments run through what the tax code calls an “accountable plan,” using either the IRS standard mileage rate or a fixed and variable rate (FAVR) allowance. The IRS tax-free vehicle reimbursement rules come from Internal Revenue Code Section 62(c), Treasury Regulation 1.62-2, and Revenue Procedure 2019-46, not from Notice 2011-72, which addressed employer-provided cell phones and expressly does not apply to other fringe benefits.¹ For 2026, the standard business mileage rate is 72.5 cents per mile.²

The Accountable Plan Requirements

Under Section 62(c) and Treasury Regulation 1.62-2, a reimbursement arrangement qualifies as an accountable plan only if all three conditions are met:

The expense has a business connection.
The employee substantiates the expense to the employer.
The employee returns any amount paid in excess of substantiated expenses.

If any one of these three fails, the entire payment becomes taxable wages subject to income tax withholding and payroll taxes.³ For vehicle expenses specifically, the IRS recognizes two methods that satisfy the substantiation requirement when paired with proper mileage records: the standard mileage rate and the FAVR allowance.⁴

Deadlines for Substantiation and Returning Excess

Treasury Regulation 1.62-2(g)(2) sets specific safe harbors so “reasonable period of time” isn’t left to interpretation. Under the fixed-date method, the employee must substantiate an expense within 60 days after paying or incurring it and return any excess within 120 days.³

The alternative is the periodic-statement method. The employer sends statements at least quarterly asking the employee to substantiate outstanding expenses or return unsubstantiated amounts, and the employee has 120 days from each statement to comply. An employer must pick one method and apply it consistently. Miss the deadline, and the unsubstantiated or unreturned portion converts to taxable wages.

Business Miles Versus Commuting

Most reimbursement disputes come down to what counts as a business mile. The IRS treats driving between your home and your regular place of work as commuting, and commuting is never reimbursable tax-free, regardless of distance or whether you work during the drive.⁴ Business miles begin once you leave your regular workplace for a second work location, a client site, or another business destination.

Two situations expand what counts:

If you have a regular office but drive to a temporary work site expected to last one year or less, the trip from home to that temporary site is business mileage.
If your home qualifies as your principal place of business, travel from home to any other work location in the same trade or business counts as deductible transportation.

An employee who logs commuting as business driving puts the whole plan at risk, so the employer’s policy should define which trips qualify.

The Standard Mileage Rate Method

The simpler option pays a flat rate per business mile. For 2026, that rate is 72.5 cents, and it covers all vehicle operating costs: fuel, insurance, depreciation, maintenance, registration, and tires.⁵ The IRS resets the rate each year based on a third-party study of actual costs.

For the payment to stay tax-free, the employee has to record each business trip with enough detail to be verifiable: date, destination, business purpose, and miles driven. The reimbursement equals the rate multiplied by the substantiated miles. Anything paid above the standard rate is taxable wages.⁴

This method is easy to administer. The employee tracks miles; the employer multiplies. Nobody collects gas receipts or insurance declarations. It tends to fall short for employees in high-cost regions or those driving expensive vehicles, which is where FAVR comes in.

Fixed and Variable Rate Allowances

A FAVR allowance reimburses based on the actual costs of owning and operating a vehicle in a specific geographic area rather than applying one national rate. Revenue Procedure 2019-46 sets the detailed rules.⁶ The allowance has two parts, each paid at least quarterly:

A fixed periodic payment covering ownership costs that don’t change with mileage: depreciation or lease payments, insurance, registration, and personal property taxes.
A variable periodic payment covering operating costs that scale with miles driven: fuel, oil, tires, and routine maintenance.

The cost data behind both payments has to come from the employee’s actual geographic area, reflect retail prices, and be statistically defensible.

Employee Eligibility

Not every employee can receive a FAVR allowance. The employee must substantiate at least 5,000 business miles per year, or 80 percent of the plan’s annual business mileage figure, whichever is greater. Mid-year joiners and leavers can prorate monthly.⁶

The employee also has to own or lease the vehicle, and the vehicle’s original cost when new must be at least 90 percent of the “standard automobile cost” the employer uses to build the allowance. For 2026, the maximum standard automobile cost for FAVR purposes is $61,700.⁵ The model year can’t exceed what the plan’s retention period allows.

Employer Administration

FAVR plans take more work than the standard rate. The employer bases the allowance on local cost data, pays both components at least quarterly, and gives each covered employee an annual statement within 30 days after year-end. Because the numbers rest on current local costs, the underlying data effectively has to be refreshed each calendar year. Employers who don’t want that overhead usually go with the standard mileage rate.

What Happens If the Plan Fails

When an arrangement doesn’t meet accountable plan requirements, every dollar it pays becomes a “nonaccountable plan” payment. The employer must include the full amount in the employee’s gross income, report it as wages on Form W-2, and withhold and pay federal income tax, Social Security tax, FUTA, and any other applicable employment taxes.³

Timing depends on how the plan fails. If the structure is sound but an employee simply misses a substantiation or return deadline, only that unsubstantiated or unreturned amount becomes taxable, no later than the first payroll period after the deadline passes. If the plan itself fails one of the three core requirements, every payment under it is taxable when paid.

The IRS also targets arrangements that recharacterize salary as reimbursement. Revenue Ruling 2012-25 addressed several scenarios where an employer routed part of compensation through a supposed accountable plan; because the reimbursement amount didn’t move independently of the employee’s actual expenses, the business-connection requirement wasn’t genuinely met and the entire arrangement was treated as nonaccountable.⁷

If Your Employer Doesn’t Reimburse You

Before 2018, employees could deduct unreimbursed business vehicle expenses as a miscellaneous itemized deduction subject to a 2-percent-of-AGI floor. The Tax Cuts and Jobs Act suspended that deduction starting in 2018, and the One Big Beautiful Bill Act made the suspension permanent. Notice 2026-10 confirms that the business standard mileage rate cannot be used to claim an itemized deduction for unreimbursed employee travel expenses.⁵

A few narrow exceptions survive. Members of a reserve component of the Armed Forces, state or local government officials paid on a fee basis, qualified performing artists, and eligible educators can still deduct unreimbursed expenses as an adjustment to gross income on Schedule 1. For everyone else, unreimbursed business driving comes out of your own pocket with no tax offset, which is why getting an employer onto a proper accountable plan matters.

State Reimbursement Requirements

Federal tax law doesn’t require an employer to reimburse vehicle expenses at all; it only sets the framework for making reimbursements tax-free when the employer chooses to pay them. A small number of states require reimbursement of necessary business expenses, including mileage, under state labor law. Those statutes don’t specify a rate, so most employers default to the IRS standard mileage rate. If you work in a state with a mandatory reimbursement law and aren’t being paid for business driving, that’s a wage claim under state law, separate from the federal tax question.

A Note on Notice 2011-72

Notice 2011-72 is frequently cited in vehicle reimbursement discussions, but it has no application to vehicles. It addressed employer-provided cell phones after Congress removed them from the “listed property” category in the Small Business Jobs Act of 2010, and the notice states that its exclusions apply solely to cell phones.¹ Vehicles remain listed property with their own substantiation rules, governed by Section 62(c), Treasury Regulation 1.62-2, and Revenue Procedure 2019-46.

1
Internal Revenue Service. Notice 2011-72
2
Internal Revenue Service. IRS Sets 2026 Business Standard Mileage Rate at 72.5 Cents per Mile, Up 2.5 Cents
3
eCFR. 26 CFR 1.62-2 – Reimbursements and Other Expense Allowance Arrangements
4
Internal Revenue Service. Publication 463 – Travel, Gift, and Car Expenses
5
Internal Revenue Service. Notice 2026-10
6
Internal Revenue Service. Rev. Proc. 2019-46
7
Internal Revenue Service. Internal Revenue Bulletin 2012-37