IRS Boosts Scrutiny of Exec Pay

The Internal Revenue Service has increased scrutiny of executive pay by checking the personal tax returns of corporate executives when their company is audited, a move that may lead to fuller audits of managers.

The IRS sent a memo to field auditors in August informing them that a comprehensive examination of any corporation should include assessing the “compliance risk of corporate officers and other key executives,” agency spokesman Terry Lemons said Wednesday.

“We have stepped up activity in that area,” Lemons said. The efforts are on top of a long-standing practice of matching compensation reported by executives with the tax deduction claimed by the company, he said.

The initiative is part of a broader tax enforcement effort by IRS Commissioner Mark W. Everson aimed at increasing audits of high-income individuals and corporations. In the last year, audits of Americans earning more than $100,000 have increased, and the agency has offered to settle tax shelter cases, including one involving the use of family limited partnerships to avoid taxes on stock options.

IRS auditors have been instructed to examine executives’ returns for seven areas of abuses, Lemons said.

In addition to spotting family limited partnerships set up to avoid tax, auditors were instructed to look for the use of fringe benefits, some deferred compensation arrangements, abusive “split-dollar” life insurance arrangements, golden parachutes and stock options involving phantom companies.

Arthur Levitt, former chairman of the Securities and Exchange Commission, said the additional IRS scrutiny would have repercussions in corporate America.

“What’s part of the pay package very often is disguised from the IRS,” Levitt said. “This is going to send a shock through corporate America and probably will do more to curb the excess compensation that’s being paid to executives than anything we’ve seen, than any ruling or action by the board.”