Tax Authorities Increase Scrutiny on High-Earning Executives
High-salary executives are facing increased tax scrutiny, according to a recent warning. Tax authorities are reportedly focusing on income mismatches, employee stock ownership plans (ESOPs), and foreign assets as part of a broader compliance push.
- This compliance push is significantly funded by the Inflation Reduction Act, which initially provided the IRS with an additional $45.6 billion for enforcement activities, enabling a renewed focus on high-end noncompliance after years of budget cuts. The agency has specifically identified over 125,000 instances of high-income individuals earning over $400,000 who have failed to file tax returns since 2017. - The IRS's Large Business and International (LB&I) division is central to this effort, utilizing a specialized unit known as the Global High Wealth group, or "Wealth Squad," to conduct complex audits on high-net-worth individuals and their associated entities, including partnerships, trusts, and private foundations. - With Employee Stock Ownership Plans (ESOPs), the IRS is particularly scrutinizing the valuation of company stock. Regulators are concerned that inflated valuations could be used in S corporations to create artificially large, tax-deductible contributions that primarily benefit high-income owners rather than the employees. - Regarding foreign assets, enforcement is intensifying through the Foreign Account Tax Compliance Act (FATCA), which requires foreign financial institutions to report on the holdings of their U.S. clients. U.S. taxpayers must file a Form 8938 for foreign assets exceeding thresholds as low as $50,000, and failure to do so can result in a $10,000 penalty, with additional penalties for continued non-compliance. - Separately, the Bank Secrecy Act requires U.S. persons to file a Report of Foreign Bank and Financial Accounts (FBAR) if the aggregate value of foreign accounts exceeds $10,000 at any time during the year. Willful failure to file can lead to severe penalties, including the greater of $100,000 or 50% of the account balance. - The scrutiny extends to personal use of corporate aircraft, where the IRS is auditing to ensure executives are properly reporting personal trips as taxable fringe benefits rather than improperly classifying them as business expenses. - For publicly traded companies, the Tax Cuts and Jobs Act eliminated the "performance-based compensation" exception for deducting executive pay over $1 million under Section 162(m). This means compensation from stock options and other performance-based awards is now consistently subject to the deduction limit.
