IRS is scrutinizing executive pay

24 audits are under way into perks, benefits, salary

December 31, 2003|By Kathy M. Kristof | Kathy M. Kristof,LOS ANGELES TIMES

Spurred by a congressional investigation into executive compensation at Enron Corp., federal tax authorities have for months been quietly scrutinizing the salaries and fringe benefits of top officers at other big companies.

Two dozen audits are under way, said Keith M. Jones, director of field specialists at the Internal Revenue Service, and more are planned.

"In the past five years, compensation has grown in complexity, creativity and dollar value," Jones said. "Our issue is not with how much executives are paid. Our issue is whether the rules are being followed and the proper amount of tax is being paid."

Federal law bars tax authorities from disclosing the names of audit targets. Jones said the audits were being performed at an array of companies across the country.

Launched without fanfare last summer, the audits focus on corporations rather than individuals. The IRS is reviewing executive tax returns as part of the corporate audit process to determine whether the company and the executive were taking consistent tax positions, experts said. Dozens of executives, officers and directors may be placed under the microscope at each corporation audited, the experts added.

"The audits are active. They're very real and very serious," said David R. Fuller, a tax lawyer with McDermott, Will & Emery in Washington. "The IRS is asking corporate tax directors to give them the personal returns of their executives, officers and directors."

As part of the initiative, the IRS trained a team of examiners who were provided with lists of questions aimed at ferreting out issues the government believes to be troublesome.

It is too early to tell what the compensation audits will uncover, but experts believe that hundreds of millions of dollars in tax underpayments might be at stake.

The IRS is looking at eight general types of compensation typically provided to upper executives:

Nonqualified deferred compensation, such as supplemental retirement plans.

Stock options, which are rights to buy company shares at a set price in the future.

Family limited partnerships, which are estate-planning tools often used to pass assets to children at a discount to current market value.

Fringe benefits, such as company-paid cars and housing, corporate jets and other perks.

Split-dollar life insurance, which can benefit the company and the policyholder's heirs.

Golden parachutes, which are lucrative payments to executives who are fired or leave under certain other specified circumstances.

Offshore employee-leasing arrangements the IRS contends are illegal tax shelters that pay individuals from offshore affiliates for work done in the United States.

So-called 162(m) deductions, which restrict companies from deducting pay of more than $1 million that does not meet performance criteria.

The two areas of particular interest are executive perks and stock option arrangements.

The Los Angeles Times is a Tribune Publishing newspaper.

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