Does your public company reimburse employees’ business or moving expenses? Provide company vehicles, achievement awards, safety awards, education assistance, tuition reimbursements, company credit cards or other fringe benefits or expense reimbursements? Reward employees with gift cards? If so, you should be aware the Internal Revenue Service is focused on fringe benefits as part of its efforts to close the “tax gap”.
Employers make available a wide variety of fringe benefit and reimbursement arrangements to employees, particularly executive employees. These benefits and reimbursements are considered taxable income to employees unless a specific exclusion exists under the Internal Revenue Code (“Code”) and all of the applicable statutory requirements are satisfied (for example, documentation, substantiation, recordkeeping and, in some cases, nondiscrimination in favor of highly paid executive employees). In addition, there may be documentary compliance considerations with respect to certain reimbursement arrangements under section 409A of the Code.
Historically, the IRS has not aggressively pursued compliance with respect to the proper tax treatment of fringe benefits and reimbursement arrangements. More recently, however, the IRS has stated it believes that there is widespread noncompliance in this area. In 2010, the IRS embarked upon a three-year, 6000-employer National Research Project (“NRP”) employment tax audit initiative that is focused on fringe benefits (PDF) and reimbursement arrangements (PDF), payroll taxation issues, worker misclassification (i.e., independent contractor versus employee) and executive compensation issues. The ultimate purpose of the NRP employment tax audit initiative appears to be determination of the most common areas of noncompliance, which can then be targeted as a source of easy money for the government’s coffers.
OUR TAKE: Employers, including public companies, should review all existing fringe benefit and reimbursement arrangements, including those contained in executive employment and severance agreements, employee handbooks, as well as other formal and informal policies and programs to determine whether all such arrangements are administered, reported and taxed properly in accordance with all applicable statutory requirements.
*Many thanks to Lisa Christensen, a Gardere associate, for her contribution to this post.