Certified Relocation Professional (CRP) Practice Exam

What is one of the significant outcomes of using a lump sum reimbursement approach?

1. Higher overall administrative costs

2. More frequent policy exceptions

3. Reduction in tax liability for transferees

4. Increased oversight on expense documentation

The correct answer is: Reduction in tax liability for transferees

Using a lump sum reimbursement approach can lead to a reduction in tax liability for transferees primarily because lump sums are often provided as a one-time payment without the detailed tracking and documentation required for traditional reimbursement methods. When employees receive a lump sum payment, they are typically responsible for managing their own expenses associated with the relocation. This self-service nature generally shifts the tax burden on the transferees since they have the flexibility to use the funds at their discretion, and in many cases, they may be able to manage their moves or claim deductibles in a way that minimizes taxable income. In contrast, the other options relate to different aspects of administrative management associated with relocation policies. For example, higher overall administrative costs and increased oversight on expense documentation are typically associated with more structured reimbursement processes where more detailed tracking is required. Similarly, more frequent policy exceptions suggest a complexity and the burden of special cases, which are less likely with the simplification of a lump sum approach. Thus, the lump sum reimbursement method streamlines the process, which can lead to a reduction in how transferees' tax liabilities are handled compared to traditional reimbursement methods.