IRS Steps Up Exec Comp Audits

December 5, 2003 ( - The Internal Revenue Service will be looking over the shoulder of executives at some companies to make sure they're properly following the rules for giving top executives stock options, fringe benefits and other perks.

The agency is auditing two dozen companies to find out whether their executive compensation practices follow the letter of the law and is expected to be expanded to more companies in coming months, according to the Associated Press. In cases where the exams show the law to be hazy or vague, the tax officials plan to issue clarifications and guidance.

The IRS identified areas getting heightened scrutiny:

  • stock options
  • fringe benefits such as the business and personal use of private jets
  • retirement contracts, also known as golden parachutes
  • deferred compensation plans, including those that disperse some compensation among family members
  • rules that cap deductible compensation at $1 million
  • employee leasing programs
  • a type of life insurance.

“Executive pay packages have become much more complex. We’re taking a close look at these vehicles to make sure they fully comply with the law,” IRS Commissioner Mark Everson said. The program started this summer and intensified this fall, said Keith Jones, IRS director of field specialists. “We clearly increased our focus around these executive compensation type issues,” he told the AP.

The examinations may also lead to audits of some top officers’ personal tax returns, Jones said. Tax laws, in some cases, link the way certain benefits are treated on corporate tax returns and individual tax returns. The audits would make sure those rules were followed.

Brent Longnecker, president of Longnecker & Associates, said there needs to be a middleman making sure the rules are followed or clarified to protect the interests of shareholders. Longnecker’s consulting group advises companies on executive compensation and corporate governance. The best solution, he said, would see the industry policing itself before lawmakers step in with new laws and regulations.