Executive compensation has evolved dramatically in recent years, in terms of creativity, complexity and dollar value. For example, stock options, deferred compensation, fringe benefits and other “non-cash” alternative forms of payment are becoming increasingly popular at business types of all sizes, making up a larger portion of executives’ overall compensation packages.
But creativity isn’t fooling Uncle Sam. The IRS is well aware that executives often receive extraordinary (and potentially taxable) fringe benefits that are not provided to other employees. And executive perks that are not properly reported can land both you and your company in hot water.
Under the IRS’s watchful eye
If your organization does get audited, here’s what you might expect as the IRS examines your executive compensation and fringe benefits:
- Assessment of corporate executives and officers to identify the highly compensated employees and determine who is responsible for approving and processing their payments.
- Review of meeting minutes concerning executive compensation. In this case, auditors are looking for decisions and instructions about the treatment of fringe benefits.
- Inspection of employment contracts and severance agreements to identify salaries and benefits.
- Examination of loan agreements between the corporation and executives and officers.
- Evaluation of monthly expense reports submitted by executives.
- A search of accounts payable records for the names, titles and Social Security numbers of executives to establish if payments made to them were included on their Forms W-2 or 1099.
- Examination of any documents filed with the Securities and Exchange Commission, such as Form 10-K, to identify compensation issues.
- Scrutinizing of payroll codes or other accounting codes which might be used for executive expenses to detect payments which may be taxable.
- Analysis of certain items on tax returns to see if fringe benefits have been claimed.
Getting ahead of an audit
When it comes to executive compensation, getting the details right and staying in compliance can be a daunting task. Reach out to the CPAs at Magone & Company to ensure your company’s executive compensation plans are in line with IRS regulations.