IRS Says Greater Scrutiny is Coming for ESOPs
In a statement released on Aug. 9, 2023, the Internal Revenue Service (IRS) issued warning to businesses and tax professionals regarding certain compliance issues of Employee Stock Ownership Plans (ESOPs), noting this is part of a wider effort to ensure high-income filers pay the taxes that they owe. The press release also urged taxpayers to seek advice from trusted and independent tax professionals rather than those they believe are marketing ESOP transactions as a way to avoid paying taxes.
IRS to Focus on Risky Practices
The statement seems to target S-Corp ESOPs and their tax compliance, specifically companies with a parent holding or management company structure. The IRS statement mentions promoted arrangements using ESOPs as “potentially abusive,” in which management S-Corps’ stock is owned by an ESOP for the purpose of diverting taxable business income to the ESOP in the form of a loan to the business owners. The IRS states that it disagrees with this interpretation of the transaction, which could lead to the company losing its S-Corp status.
Additionally, the IRS asks for “improper or abusive” tax activities be reported using a completed Form 14242, Report Suspected Abusive Tax Promotions or Preparers.
The ESOP Association Responds
The ESOP Association has responded and agreed that ESOP sponsors should engage with experienced ESOP professionals, while also discouraging any efforts to promote ESOPs as a practice to avoid paying taxes. The ESOP Association has also reassured that it will continue to monitor further developments as well as seek further information from the IRS and the Department of Treasury regarding their intentions with an ESOP compliance focus.
Windham Brannon Can Help
Windham Brannon’s ESOP professionals work with integrity as your trusted advisors, including assisting with building your team to structure your ESOP and related tax compliance. If you have any questions regarding recent statements from the IRS or about your current or potential ESOP structuring, please contact your Windham Brannon advisor today, or reach out to Donna Caruso.
