What is the IRS telling its agents to look for in the executive compensation arena when they audit an employer? The IRS has recently posted on their website “audit technique guides (ATGs) that agents use during the course of corporation and/or executive employee tax examinations” which cover these topics:
- Transfers of Compensatory Stock Options to Related Persons
- Non-Qualified Deferred Compensation Plans
- Stock Based Compensation
- IRC 162(m) Salary Deduction Limitation
- Fringe Benefits
- Golden Parachutes
- Split Dollar Life Insurance
The ATGs contain some very useful information for practitioners, including statements about where the agents wil be looking for information and whom they will interview in search of information in an audit. For instance, agents will be asking to interview “company personnel that are most knowledgeable on executive compensation practices, such as the director of human resources or a plan administrator,” determining “whether the company paid a benefits consulting firm for the executive’s wealth management” and reviewing copies of the “contract between the consulting firm and the corporation.” According to the guides, agents will also be reviewing Board of Directions and Compensation Committee minutes, 10-K and 14-A Proxy Statements, websites for the employer, as well reading Fortune magazine articles and “googling” the internet for “information on the corporation for the years under audit.” (Does that mean that agents will be searching blogs such as Foonoted.org, seeking to uncover information that would be useful in an audit?)
The ATGs could also be helpful for companies that wish to perform a self-audit of their executive compensation practices, by providing a road map of the issues that IRS will be looking at and pointing out areas of concern that can occur such as as this one under the “Non-Qualified Deferred Compensation Plans” section:
A NQDC plan that references the employer’s § 401(k) plan may contain a provision that could cause disqualification of the § 401(k) plan. Section 401(k)(4)(A) and § 1.401(k)-1(e)(6) provide that a § 401(k) plan may not condition any other benefit (including participation in a NQDC) upon the employee’s participation or nonparticipation in the § 401(k) plan. Watch for things like a NQDC plan provision that limits the total amount that can be deferred between the NQDC plan and the § 401(k) plan or a NQDC provision that states that participation is limited to employees who elect not to participate in the § 401(k) plan. Contact Employee Plans in the TEGE Operating Division or Counsel TEGE if provisions such as these are encountered.
Also, the “Non-Qualified Deferred Compensation” section of the guides goes on to mention briefly new Internal Revenue Code § 409A (which provides comprehensive rules governing nonqualified deferred compensation arrangements) but states that the “audit guide will be updated to elaborate on § 409A once comprehensive regulations have been issued.”
Haynes and Boone discusses the ATGs here in a Compensation Alert.