How prepared is your company to undergo an executive compensation audit by the Internal Revenue Service?

Can you produce the necessary information and records?

Are you ready to deal with the consequences of failing an audit, including the inability of senior executives to lead or remain with the company, negative public perceptions of the company, possible reductions in stock price, tax liabilities for improperly reported deductions, fines/penalties, and the referral of certain matters to the SEC for further scrutiny?

Solenture has responded with a service to help corporations prepare for an audit and correct any problem areas before the IRS arrives.

BACKGROUND
 

In November 2003, the IRS launched an initiative to evaluate the level of compliance by public companies and their executives on tax-related executive compensation requirements. The findings were released in 2004, and the audit of the first 24 corporations uncovered significant defects, including failures by executives to report their compensation. Also discovered were deficient corporate governance practices involving incentive payments, nonqualified deferred compensation and golden parachutes. As a result, the IRS will be releasing new audit guidelines on executive compensation and is expected to expand its review and audit of public corporations’ executive compensation practices and reporting.

In addition to reviewing plans from the corporate perspective, in September 2004, a Director of Field Specialists for the IRS stated that the IRS would be conducting audits of executives’ individual tax returns as part of the executive compensation compliance initiative. This is a significant departure from previous practice, in which the IRS was simply interested in matching an executive’s reported compensation on Form 1040 against the deductions taken on the corporation’s tax returns without auditing the executive’s return as a whole.

OUR SERVICE
 

Solenture has developed a service to help corporations prepare for an executive compensation audit. All data is analyzed to provide a summary report of observations and recommended actions for the reviewed executive compensation programs. Areas that need to be addressed are highlighted, and we are available to help the organization make necessary changes or improve processes to prepare for an actual audit.

Areas included in our review process are:

• Nonqualified deferred compensation plans or arrangements

• Stock-based compensation arrangements

• $1 million nonperformance-based compensation deduction limitation - IRC Section 162(m)

• Golden parachutes - IRC Section 280(g)

• Split dollar life insurance arrangements

• Loans to executives

• Asset protection schemes/listed transactions

• Executive fringe benefits or perquisites

• Personal tax returns of corporate officers

Legal opinions issued as part of the Compliance Review service are provided by McDermott Will & Emery, an independent law firm that is not affiliated with Solenture. Services provided by McDermott Will & Emery will be performed only in accordance with a separate letter of engagement that describes the services to be provided. Clients are not required to engage McDermott Will & Emery.

THE BENEFITS TO YOU
 

Your organization can benefit greatly from an Executive Compensation Compliance Review in terms of understanding what is involved and having the opportunity to take any corrective actions. Specifically, the review can help your organization:

• Prepare for a possible audit

• Organize data

• Document processes and systems

• Identify and address any issues or problems

• Avoid IRS penalties, negative press coverage or possible criminal charges

Additional information about the IRS’s audit initiative is available in two recently published articles:

IRS Takes Aim at Compensation from Financial Executive magazine and

IRS Expands and Reinforces its Executive Compensation Audit Initiative from a McDermott Will & Emery newsletter.

To learn more, please contact us at (800) 456-7226.

Securities products offered through registered representatives of Mid Atlantic Capital Corporation (MACC). Member FINRA and SIPC. Solenture is not a subsidiary or control affiliate of MACC.
Advisory services offered through Solenture Advisors LLC., a registered investment advisor.