Are There Red Flags for the IRS in Travel Nursing Pay?

The guidelines pertaining to taxable wages in the travel nursing industry are opaque. Of course, this leads to controversy. Some agencies pay higher taxable wages and proportionally lower non-taxable reimbursements. They assert that lower taxable wages will result in a “red flag” with the IRS. Other agencies pay lower taxable wages and proportionally higher non-taxable reimbursements. They assert there is nothing wrong with doing so and sometimes refer to the “red flag” issue as a myth. In this article, we’ll provide a brief recap on taxable wages in the travel nursing industry and take a close look at the issue of “red flags”.

Ambiguity Raises Questions Regarding Taxable Wages for Travel Nurses

I recently came across a conversation on social media that is indicative of this issue. A travel nurse explained he was hearing two different stories regarding taxable wages. One story says that an hourly wage of less than $20 for a registered nurse sets off a red flag with the IRS. The other story says there is no problem with taxable wages between $15-$20 per hour. In fact, he received pay quotes from large companies with taxable wages between $15-$20 per hour. Those agencies told him the IRS said it’s okay. He was looking for concrete proof as to which story is correct.

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In response, one travel nurse explained that she had received information about this issue from a prominent tax adviser while she was attending the 2017 Travelers Conference. This tax adviser said taxable wages less than $20 per hour raise a red flag with the IRS. In another response, a travel nurse explained that he had spoken to the same tax adviser regarding the issue. But in this circumstance, the adviser said that “red flags” are a myth.

Essentially, there are two separate issues at play:

1. Is there a law, statute, or IRS regulation specifying the exact taxable hourly wage for travel nurses?
2. Can this issue raise “red flags”?

Is there a law, statute, or IRS regulation specifying the exact taxable hourly wage for travel nurses?

The simple answer to this question is, No. Hence all of the desperate interpretations and controversy. Instead, the IRS deals with these issues on a case by case basis. We’ve covered the issue in detail in previous blog posts, but a little refresher is pertinent here.

Why Does There Need To Be A Minimum Taxable Wage For Travel Nurses?

In order to legally pay tax free reimbursements, a travel nursing company must maintain what the IRS refers to as an “Accountable Plan”. There are many requirements for maintaining an Accountable Plan. If the IRS determines the requirements are not met, then they will deem it a “Nonaccountable plan”. As a result, the agency and travel nurse will have to pay taxes on the reimbursements as if they were income.

“Wage Recharacterization” is one of the issues that can disqualify an Accountable Plan. Here again, many scenarios can result in wage recharacteriztion. Paying really low taxable wages is one such scenario.

But the IRS doesn’t specifically define what a low taxable wage is. As a result, individual agencies, industry associations, tax experts and others are left to interpret prior tax-court rulings in an effort to determine a reasonable wage. The resulting ambiguity is one of the reasons we list tax-free money as both a pro and a con on our list of The Pros and Cons of Travel Nursing.

What Do The Experts Say the Minimum Wage for Travel Nurses Should Be?

The National Association of Travel Healthcare Organizations states the taxable wage should be, ” a reasonable hourly rate of pay that would represent fair market value compensation for that occupation.” Meanwhile, you’ll find tax experts focused on the travel healthcare niche who say Registered Nurses should earn a minimum of $18 per hour. You’ll find others who say the minimum should be $20 per hour. The story above indicates that some believe the number is $15 per hour. I’m sure there are many other interpretations out there.

All parties to this debate want to defend their stance. One way of doing so is to raise the possibility of a red flag with the IRS. Which begs the question….Are “red flags” for real?

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The simple answer is, Yes. Red flags are a real issue in travel nursing. I have firsthand experience with them, both from the agency’s perspective and from the traveler’s perspective. I’ll share those stories below. But first, it’s important to have a fundamental understanding of what red flags are as they pertain to the IRS.

What is a Red Flag for the IRS?

At the most basic level, a “red flag” is a warning in any context. So, for the IRS, a red flag is anything in a tax record that seems suspicious. It really is that basic.

With that in mind, let’s turn to the discovery process. The IRS uses a combination of automated and human processes to decide which tax returns to audit. According to the IRS, “increasingly efficient automated systems generate most IRS audits.” The remainder are generated by human reviews.

For the automated process, the IRS uses algorithms that compare tax returns to statistical norms. It’s safe to say that the human process is more intuitive. In both cases, tax returns with anomalies go through a three step review process conducted by IRS personnel before they make it to the audit phase.

The Standard Argument that There are No Red Flags in Travel Nursing and What It Leaves Out

Now, the standard argument of those who contend there are no IRS red flags for travel nursing pay goes something like this:

All the IRS sees is gross taxable income. They have no idea how much tax-free money you received. They also don’t know how many hours you worked so they have no way of knowing how much you’re getting paid per hour.

The insinuation is that there can’t be a red flag because the IRS only has this limited amount of information. Unfortunately, your W2 does not exist in a vacuum. The simple fact of the matter is that the IRS has A LOT more information than just your W2.

The IRS Knows More Than The Gross Income

For starters, they have anything else you included with your tax return. For example, they’ll have your form 1098 if you paid any mortgage interest. And they have this whether you included it in your tax return or not. The lender is required to send them a copy.

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They also know how many dependents you declared. The IRS knows how much federal assistance you received. They also have your previous tax returns. They have information regarding any investment income. Finally, they have all the tax returns from every other tax paying citizen with which to compare.

The point is that the IRS has A LOT of data pertaining to your financial situation. And one of the IRS’s primary concerns is “underreported income.” I’m not saying that travel nurses are underreporting income. But, depending on the circumstances, their tax returns can make it look that way. That’s exactly how one of the travelers I used to work with ended up getting audited.

My Experience with a Travel Nurse Who Was Audited By the IRS

I worked at a healthcare staffing company as a recruiter and manager between 2006 and 2012. A travel nurse I worked with off and on between 2007 and 2011 called me in the fall of 2011. He was being audited by the IRS.  He asked if I could send every record we had available that might pertain to his taxes for the period in question.

At that time, he didn’t have all of the details yet. His goal was to gather every record he possibly could in order to prepare. Unfortunately, he hadn’t been thorough at maintaining his own records.

Luckily for him, the company I worked for is very diligent when it comes to managing their Accountable Plan. A big part of that is keeping proper records. I was able to quickly send over the following items:

1. W2’s: This one is obvious. Yes, the IRS already has copies of these documents. But in this situation, it’s comforting and useful to have your own copies.
2. Copies of his contracts: This one is less obvious. However, it might be one of the most important. Your contracts are proof that you worked temporary assignments away from your tax home.
3. Copies of his signed tax-home declarations: This one may not have been of benefit to the travel nurse, but he wanted everything. My company had travelers sign a document indicating they had a legal tax-home. It included the address of the tax home along with some basic statements pertaining to tax home maintenance. For agencies, it’s a way to maintain the validity of their Accountable Plan.
4. Copies of travel expense reports: My company also required that we maintain expense reports to justify travel related reimbursements. This included mileage logs and various receipts.

The “Red Flag” that Led to the Audit

During the process, the travel nurse informed me that the other 2 companies he worked with during the period in question had paid him a taxable rate of $10 per hour. The lowest taxable rate that my company had paid him during the period in question was $18 per hour and this was back in 2007.

Later in the process, he told me his tax adviser said that three interrelated variables led to the audit. Low taxable income was the first. The second was that he had declared three dependents, his wife and 2 sons. The third was that he was paying mortgage interest.

I never heard whether or not the IRS actually verified this supposition. However, it makes perfect sense. From their perspective, they see someone paying a mortgage of $1800 per month (his home was in Northern California), with 3 dependents and less than $27,000 in gross taxable income.

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Yes, he was deducting the mortgage interest on his taxes. However, it’s important to remember that the IRS knows about mortgage interest whether it is declared on your taxes or not. The IRS requires lenders to report all 1098s.

It’s easy to see how this travel nurse’s scenario could qualify as a “statistical anomaly”. Perhaps the audit was triggered by an automated process. It’s also possible, although increasingly unlikely, that the audit was triggered by a human review. Either way, there was enough suspicion for the traveler’s tax return to make it through the 3-step review process and result in an audit.

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My Experience with IRS Red Flags from the Travel Nursing Agency’s Perspective

I have it on good authority that similar situations exist for healthcare staffing companies. In 2010, the healthcare staffing company I worked for had a small team of auditors from Ernst & Young come in to review the company’s financial records. We weren’t in any trouble. Instead, the company was applying for a rather large line of credit from a large financial institution. The lender required that a neutral third party complete an audit. This is very common.

So a team of financial wizards from Ernst and Young came to our office daily for a period of about 3 weeks. It was a small office and we worked in close proximity. As such, we had the opportunity to discuss some tax related issues with them.

Red Flags for Travel Nursing Companies

They explained that the IRS considers all the data at their disposal when determining whether or not to audit a company. Here again, the IRS has a lot of data. The company needs to report its total revenue. They also need to report their payroll taxes. And they’ll need to deduct the value of the reimbursements they pay to their travelers.

With this information alone, the IRS is able to see how much the company is paying in taxable wages versus how much they’re paying in reimbursements. The auditors explained that it’s fair to assume a red flag exists if these numbers are outside the statistical norm.

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For travel nurses, it’s important to note that there are ramifications for travelers when an agency gets audited. If the audit pertains to the agency’s Accountable Plan, then it will most certainly involve an audit of the agency’s employees.

Real Red Flags and the Gray Area

It’s fair to say that “red flags” are a very real thing as they pertain to travel nursing pay packages. Sure, a low taxable wage may not raise a red flag on it’s own. However, the low taxable wage doesn’t exist in a vacuum. The IRS has plenty of other data to add context.

The simple fact that both travel healthcare professionals and agencies have been audited for this reason is proof enough. An audit happens because the IRS has found a reason to be suspicious. That suspicion is what is meant when people use the term “red flag”.

Unfortunately, there is no way to settle the debate over the exact taxable wage that will avoid suspicion. It’s fair to assume that the number could vary from case to case. Moreover, it could also vary over time.

On a personal note, I’d be suspicious of exclamations that, “the IRS said it was okay.” This doesn’t sound like a very IRS thing to do. They certainly don’t provide a service whereby they review accountable plans and sign off on them. Therefore, I’d recommend digging deeper to determine how someone got this approval from the IRS. Perhaps they were audited?

Consider The Risks and Disadvantages to Determine Your Comfort Zone

Ultimately, travel nurses and agencies are left to consider the risks and determine what they’re comfortable with. Travel nurses should also consider that there are disadvantages to lower taxable wages as well. Social security contributions are smaller. Workers comp, disability and unemployment benefits will be less should you need them. It will be more difficult to get home loans and auto loans. At the end of the day, it may not be worth it to accept taxable wages that are lower than the commonly recommended amounts to avoid IRS scrutiny.

As always, we’d love to hear your thoughts on this topic! Please share any experiences, questions or concerns in the comments below!