IRS takes a closer look at pay

IRS takes a closer look at pay

Kate O’Sullivan

EXECUTIVE-COMPENSATION packages are getting a lot of attention these days, and now the Internal Revenue Service is taking a harder look. In November, the IRS quietly announced an audit initiative focusing on executive compensation. The campaign–an effort of its Large & Mid-Size Business Division–will dig deeper into complex pay arrangements.

Among the areas under scrutiny: deferred compensation, stock-based pay, family limited partnerships, and fringe benefits such as corporate-jet use. The IRS will also examine golden parachutes, split-dollar life insurance, and the $1 million cap on compensation deductions. “Maybe this extra light will help people to take a closer look at their plans,” says Keith M. Jones, director of field specialists for the IRS division.

IRS representatives say the service is not making any new rules at this point, but is simply turning a spotlight on executive-compensation packages, which have grown more complicated in recent years. “They’ve decided they need to go after this in a more coordinated way,” says Andrew Liazos, a partner at McDermott, Will & Emery’s Boston once and chair of the firm’s executive-compensation practice. “This is the time to inventory exactly what you have and identify what your exposure is,” he adds.

The IRS says its audits will involve an evaluation of whether corporate tax deductions are consistent with income reported by the executive. The service will also investigate whether companies and their executives have accounted for such taxable perks as company-ear use and relocation benefits, and whether they’ve valued the benefits appropriately. To prepare for such scrutiny, says Liazos, a company’s finance, human-resources, and tax groups all need to work together to review compensation practices and make sure each department knows where unusual arrangements, if any, have been made.

Will companies simply try to stay one step ahead of regulation, devising new ways to lessen the tax impact of compensation? “It’s certainly possible that some companies will seek other ways to get around the new scrutiny,” says John Challenger, CEO of Chicago-based out-placement firm Challenger, Gray & Christmas Inc. “But I think we’re in an environment where companies are going to be careful to comply.”

401(k) DROPOUTS

Employee-participation rates in company 401(k) plans dropped another 3.6% in 2003, after a decline of 2.5% in 2002, according to a survey by PlanSponsor.

EXECUTIVE-COMPENSATION packages are getting a lot of attention these days, and now the Internal Revenue Service is taking a harder look. In November, the IRS quietly announced an audit initiative focusing on executive compensation. The campaign–an effort of its Large & Mid-Size Business Division–will dig deeper into complex pay arrangements.

Among the areas under scrutiny: deferred compensation, stock-based pay, family limited partnerships, and fringe benefits such as corporate-jet use. The IRS will also examine golden parachutes, split-dollar life insurance, and the $1 million cap on compensation deductions. “Maybe this extra light will help people to take a closer look at their plans,” says Keith M. Jones, director of field specialists for the IRS division.

IRS representatives say the service is not making any new rules at this point, but is simply turning a spotlight on executive-compensation packages, which have grown more complicated in recent years. “They’ve decided they need to go after this in a more coordinated way,” says Andrew Liazos, a partner at McDermott, Will & Emery’s Boston once and chair of the firm’s executive-compensation practice. “This is the time to inventory exactly what you have and identify what your exposure is,” he adds.

The IRS says its audits will involve an evaluation of whether corporate tax deductions are consistent with income reported by the executive. The service will also investigate whether companies and their executives have accounted for such taxable perks as company-ear use and relocation benefits, and whether they’ve valued the benefits appropriately. To prepare for such scrutiny, says Liazos, a company’s finance, human-resources, and tax groups all need to work together to review compensation practices and make sure each department knows where unusual arrangements, if any, have been made.

Will companies simply try to stay one step ahead of regulation, devising new ways to lessen the tax impact of compensation? “It’s certainly possible that some companies will seek other ways to get around the new scrutiny,” says John Challenger, CEO of Chicago-based out-placement firm Challenger, Gray & Christmas Inc. “But I think we’re in an environment where companies are going to be careful to comply.”

401(k) DROPOUTS

Employee-participation rates in company 401(k) plans dropped another 3.6% in 2003, after a decline of 2.5% in 2002, according to a survey by PlanSponsor.

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