Audit Initiative Targets Executive Compensation: The IRS Will Examine Public Companies and Their Key Employees

Article excerpt

According to an IRS webcast, the service has begun an initiative to assess compliance and target abuses related to executive compensation and benefits. CPAs who represent public companies should become familiar with this initiative.

AREAS OF INTEREST

The IRS selected 24 sample companies from five industry groups to gather compliance information on executive compensation issues. Auditors examining these businesses will focus on nonqualified deferred compensation, stock-based compensation, the $1 million cap on deductions for compensation paid to public company officers, golden parachute arrangements, split-dollar life insurance, fringe benefits and the use of two "listed transactions" (those specifically identified by the IRS as tax-avoidance transactions or expected to produce the same or similar tax consequences).

IRS APPROACH

In reviewing nonqualified deferred compensation arrangements, the IRS will examine deduction timing for deferred amounts (that is, whether a deduction has been postponed until the employee has corresponding income). It also will review whether a company's deferred compensation arrangement triggers currently taxable income and whether the company has properly applied payroll taxes.

For stock options the IRS may look at whether there has been proper income inclusion on option exercise (of on a disqualifying disposition of stock acquired from such exercise), participation rights in employee stock purchase plans and general statutory compliance. For the $1 million cap under IRC section 162(m) and golden parachute payments, the service will ensure proper compliance with statutory limits and regulations.

For split-dollar insurance arrangements, the IRS will check whether a company has included amounts in income when an insurance product has been transferred from an employer to an employee. …