IRS takes aim at compensation.

• Author: Marshall, Jeffrey
• Position: Tax Compliance - Internal Revenue Service

It's hard to find many fans of the Internal Revenue Service (IRS), and the agency is preparing to make itself even more unpopular with corporate America.

In recent months, the IRS has been moving to address "significant noncompliance by public companies with the tax law requirements applicable to executive compensation," according to attorneys at McDermott, Will & Emery (McDermott Will). The action stems from a 2003 IRS audit initiative that revealed a host of perceived compliance issues, the firm says, "ranging from non-reporting of compensation by executives to deficient corporate governance practices involving incentive payments, non-qualified deferred compensation, golden parachutes and executive perks."

The agency has been developing audit guidelines for its examiners, but has not released a timetable for publication, says Andrew C. Liazos, a Boston-based attorney with McDermott Will. The subject remains controversial, and the IRS isn't discussing it publicly, in part because of discussions about amending the IRS code to allow sharing of information with the Securities and Exchange Commission for possible enforcement actions, legal sources say.

"We'd all love to see IRS guidelines, but they don't have any requirement to release them to the public, though they would release them to the agents for audits," says David R. Fuller, a Washington-based attorney with McDermott Will.

While a few of the law firm's clients have been audited in the past on deferred compensation and golden parachutes, there has been "very little history" of the IRS actively auditing these areas, Fuller adds, describing the situation as something akin to "benign neglect."

But awareness is building. Steven C. Price, president of TBG Consulting in Pittsburgh, a firm specializing in compensation and benefits, says that in recent months, "clients are becoming aware of this going on. They're asking things like, 'How do we get ourselves organized?' They want to build awareness of this situation into their [compensation] plans." He adds, "We've had one client contact us to start pulling together data because they were being audited. The [IRS] field people seemed to be asking the questions" arising from the audit initiative.

The list of areas getting attention is "very comprehensive," Liazos says. "You need to understand where there are the greatest potential for problems--especially where there are clear rules." Three areas that need special attention, he says, involve...