FAVR reimbursements can be tax-free when your employer’s program—and your driving activity—meet all of the IRS requirements for an accountable plan.
Here’s what the IRS actually requires behind the scenes:

1. The plan must be a true FAVR program

To qualify for tax-free treatment, the reimbursement must be paid under a program that meets IRS FAVR rules, including:

  • Use of a standard vehicle cost profile set by the employer

  • Fixed + variable rate calculations based on local cost data

  • Rates that fall within the allowable IRS ranges

These requirements ensure that the reimbursement is “reasonable,” which is the IRS standard for tax-free treatment.

2. You must meet the plan’s compliance rules

Employers must define compliance criteria that align with IRS expectations, including:

  • Minimum business mileage (commonly 5,000 miles per year)

  • Vehicle age or value limits

  • Insurance coverage requirements

  • Timely mileage reporting with dates, destinations, and business purposes

If you fall out of compliance, the reimbursement can still be paid, but some or all of it may be taxable.

3. You must substantiate your business use

IRS Publication 463 requires mileage logs that include:

  • Date of each trip

  • Starting point and destination

  • Business purpose

  • Miles driven

If mileage is not properly substantiated, the reimbursement loses accountable-plan protection and becomes taxable.

4. Your reimbursement cannot exceed IRS “safe harbor” limits

Even in a FAVR plan, the IRS does not allow tax-free reimbursement amounts that exceed what would have been paid under the standard mileage rate (IRS CPM).

So when drivers are out of compliance, employers compare:

FAVR reimbursement
vs.
IRS equivalent: (business miles × standard mileage rate)

If the FAVR amount is higher, the difference may be taxable.

This is the rule your main FAQ example is based on—and it’s correct.

5. Excess reimbursements must be reconciled

If a driver receives too much reimbursement during the year (because of low mileage, noncompliance, or other changes), the employer must:

  • Tax the excess, or

  • Request payback from the driver (rare), or

  • Reconcile at year-end

This keeps the plan “accountable” so reimbursements remain tax-free when appropriate.

Bottom Line (IRS Version)

A FAVR reimbursement is tax-free only when:

✔ The employer’s program meets IRS FAVR design rules
✔ The driver meets compliance requirements
✔ Mileage is properly documented
✔ The reimbursement does not exceed IRS safe-harbor limits

If any of these conditions fail, the employer must tax the excess amount, which is why you may see taxable income in low-mileage or non-compliant months.

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