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Apr 06

IRS audits of executive compensation: Infractions to avoid

Posted by annearf in TaxIRSexecutive compensationcompliance


With April 15 rearing its ugly head, it seems a good time to consider the Internal Revenue Service's moves to target executive compensation.

Last year, the IRS revealed it was launching a stepped-up effort to investigate executive comp practices.  With that in mind, it looks like there are a number of areas attracting or that are likely to attract IRS attention, according to John Lowell, a compensation expert in Woodstock, Ga.,  and Stephen Saxon, an employee benefits expert with Groom Law Group.

These actions mostly are based on a handful of rules, such as  Section 409A, which allows for penalties for faulty executives' deferred comp programs and section 162(m), the cap on salaries over $1 million are just two examples.  

Some problem areas include:

--Failure to pay FICA tax on deferred compensation, which is considered to be part of deferred comp.

--Restricted stock that vests on retirement after a certain age. Even if the executive doesn't retire after that specified birthday and vest, the individual is supposed to pay income tax on the stock, but employers often don't report the income. 

--Severance packages. In certain cases, severance packages aren't exempt from section 409A. The specifics are complicated, but companies are known to mess it up.

According to Lowell, until a year ago, audits of executive compensation pretty much never happened. So why did the IRS decide to do this? One reason is because it's there. The government needs to find ways to increase revenues and fill the tax gap, at a time when legislators decided it was a good idea to continue the Bush tax cuts in the middle of a serious downturn. Executive compensation must seem like a ripe and previously untapped area.

But it all does mean you need a top-notch executive compensation expert. And as Lowell points out, once you find a problem, don't wait for the IRS to catch you.


Comments (1)Add Comment
william czander
written by william czander, April 13, 2011
I will bet these are no taxed.
Retired Aetna chairman and CEO Ronald Williams exercised stock options valued at more than $50 million during his last year leading the health insurance company.

The 61-year-old Williams also received a 2010 compensation package valued at more than $18 million. He retires with a pension valued at more than $9 million and a consulting job that pays $20,000 per month until next February.

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