Corporate execs to face more IRS audits

/ Source: The Associated Press

The Internal Revenue Service plans to increase audits of corporate executives after exploratory examinations uncovered significant problems.

"We did a quick check on returns and filing patterns, and we were surprised at the number who were not filing tax returns," said Keith Jones, director of IRS field specialists.

Jones said Friday that the agency expects to send a memo to all agents next week instructing them to inspect corporate executives' returns at twice the current rate, including scrutiny of such corporate perks as stock options, private jets and luxury apartments.

The IRS started examining corporate compensation last year after an explosive growth in the perquisites accompanying executive salaries. The IRS audited 24 major corporations in a sampling of industries and locations to see if they were following the rules when compensating their executives.

That study led them to look into tax returns filed by some corporate leaders. They discovered that some hadn't filed returns at all.

The agency has identified eight areas that need more oversight.

One is executive stock options. The Financial Accounting Standards Board has proposed requiring publicly traded companies to record stock options as a compensation expense.

Companies currently don't have to record the cost of options as an expense on their income statements, though some have started to do so voluntarily. Some blame stock options for aiding the corporate abuses of recent years by enticing executives at companies like Enron and WorldCom to boost stock prices by manipulating earnings.

The IRS also looked into the business and personal use of fringe benefits like private jets and vacation homes. Another area of concern is the improper use of family limited partnerships as a way to transfer compensation to other family members.

Other areas include benefit packages known as "golden parachutes" granted to executives when they leave a company; life insurance arrangements misused as a tax-free way to compensate executives or transfer wealth; and deferred compensation agreements.

The IRS wants to also make sure executives avoid an offshore employee leasing practice that improperly hides money abroad, and that companies abide by a $1 million deduction limit on executive compensation.