The Internal Revenue Service (IRS) is intensifying its focus on employee stock ownership plans (ESOPs) as part of its efforts to tighten enforcement on businesses and high-net-worth individuals.
ESOPs are investment plans primarily based on a company’s own stock, offering tax-deferred growth for employees until distribution upon retirement.
Ownership Benefits vs. IRS Concerns
Unlike employee stock-option plans, which grant the right to buy company stock at a specific price after a certain period, ESOPs are designed for long-term ownership.
These plans are often used for succession planning, allowing private business owners to transfer shares to employees and cash out their stakes.
Proponents argue that ESOPs enhance productivity and retention by giving employees a stake in the company’s success.
However, the IRS has raised concerns about businesses exploiting complex regulations in connection with ESOPs.
The agency has cautioned that it will be vigilant in identifying such cases, signaling a heightened enforcement focus on businesses and high-net-worth individuals.
The IRS has received additional funding through the Inflation Reduction Act of last year to support these efforts.
One issue of concern involves improper loans for purchasing shares, as well as questions surrounding stock valuations.
Private businesses using ESOPs are required to appraise their stock annually.
The IRS suspects that some tax structures related to these plans might divert business income from taxation.
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IRS Focus on Bridging Tax Gaps and Balancing ESOP Benefits
IRS Commissioner Danny Werfel emphasized the importance of bridging the gap between taxes owed and taxes paid, particularly in complex or questionable transactions.
The agency’s commitment to alerting higher-income taxpayers and businesses about compliance issues underscores its dedication to enhancing tax enforcement.
According to data from the National Center for Employee Ownership, over 6,400 employers offered ESOPs in 2020, covering 13.9 million individuals with holdings exceeding $300 billion in company stock.
Although ESOPs are prevalent, they are outnumbered by 401(k) plans, which were offered by approximately 600,000 employers in 2020, covering 60 million workers and retirees.
Loren Rodgers, executive director of the National Center for Employee Ownership, expressed concerns that the IRS might adopt an overly broad approach that could deter legitimate businesses from adopting ESOPs.
While acknowledging the possibility of some plans violating tax rules, he underscored the overall positive impact of ESOPs.
Younger workers participating in these plans tend to have higher household wealth and wage income, contributing to their financial well-being.
As the IRS intensifies scrutiny on ESOPs, there is a delicate balance to strike between ensuring tax compliance and avoiding discouragement of businesses aiming to offer such plans for employee benefit.
The agency’s efforts to curb abuses should ideally not hinder the potential advantages of ESOPs for workers and businesses alike.
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