IRS to Focus on ESOP Compliance

The IRS indicates in a news release its intent to focus on a range of compliance issues that can be associated with Employee Stock Ownership Plans (ESOPs). The IRS has identified numerous issues, such as valuation issues with employee stock; prohibited allocation of shares to disqualified persons; and failure to follow tax law requirements for ESOP loans causing the loan to be a prohibited transaction.

Additionally, the IRS has seen promoted arrangements using ESOPs that are potentially abusive. For instance, the IRS has seen schemes where a business creates a "management" S corporation whose stock is wholly owned by an ESOP for the sole purpose of diverting taxable business income to the ESOP. The S corporation purports to provide loans to the business owners in the amount of the business income to avoid taxation of that income. The IRS indicates that these purported loans should be taxable income to the business owners, and impact whether the ESOP satisfies several tax law requirements which could result in the management company losing its S corporation status.

The IRS notes that it will continue to use a range of compliance tools, including education, outreach, and additional examinations to address compliance issues associated with ESOPs.