IRS peers into executive compensation - 29 Jan 2010

WASHINGTON (Reuters) - As the Obama Administration seeks backing for
a tax on banks' lucrative pay packages, the Internal Revenue Service
has been stepping up its oversight of executive pay through its
auditing and other powers.

President Barack Obama needs the U.S. Congress to help him pass the
10-year $90 billion tax on bank executive compensation, but the tax
agency had already been bearing down on lavish pay and perks across
industries on several fronts.

Next month, the IRS begins an effort to audit 6,000 companies with a
focus on their employment policies, including fringe benefits and
officers' compensation. The IRS has also taken an increasingly tough
stance on deductions companies take for highly paid executives and how
deferral of pay by such executives is treated.

"The IRS knows that there is considerable noncompliance with regards
to employment taxes," said Anthony Arcidiacono, of Ernst & Young,
who spent three decades at IRS as an agent.

IRS Commissioner Doug Shulman has made tax evasion by high-wealth
individuals and corporations a priority. Last year, the agency formed a
new unit to study structures created by high-net worth individuals to
avoid taxes.

Obama's 2011 budget proposal, expected early next month, is expected
to reintroduce measures to limit corporate tax breaks and rein in use
of the tax code by companies to park money overseas to minimize U.S.
tax.

The 6,000 exams, to be conducted over three years, will be deeper
than typical audits and look at fringe benefits such as executive use
of corporate jets, company cars and other reimbursements arrangements,
Arcidiacono said.

"The examiners have been instructed to leave no stone unturned," he said on a recent call with clients.

The IRS has not taken a systematic focus on employment issues in
decades, according to tax lawyers. The agency will examine a cross
section of companies by size and industry.

"We've had quite a few clients who have had more intensive
employment tax and executive compensation audits," in recent months,
said Anne Batter, an attorney at Miller Chevalier who previously worked
in the IRS chief counsel office, which interprets the tax code.

$1 MILLION DEDUCTION CAP, DEFERRED PAY

Also under a microscope are deductions companies can take for
lucrative salaries. The law limits such deductions paid to certain top
executives to no more than $1 million per year.

This limit does not apply to compensation received for meeting
pre-established performance goals. But the IRS has been chipping away
at that exception, lawyers say.

The IRS ruled in 2008, for example, that such compensation is not
excepted when an executive is entitled to payment even if that person
is fired.

Another tax code section in the agency's arsenal, dating to the
second Bush Administration, is related to executives' use of deferred
compensation to minimize taxes.

In 2004, in the aftermath of public anger when executives of energy trader Enron withdrew