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The IRS recently announced it will be applying further scrutiny to firms structured as ESOPs
In Brief: The IRS announced that in an effort to ensure high-income taxpayers are paying what they owe, it will be cracking down on ESOPs and ensuring they are properly structured and taxed.
The Details: In the August 9th press release, the IRS details the suspected fraud as well as the nature of the crackdown. The agency highlights high-income taxpayers - in this instance larger firms who have adopted ESOPs as part of their retirement plan - as the primary offenders. The agency’s concerns lie with issues such as incorrect valuation of stock, allocating stock to those who are not eligible, and other practices used to evade taxation on a firm’s income. Because ESOPs can be a particularly complex structure, the IRS will be allocating new funds from the Inflation Reduction Act to keep up with what it describes as increasingly sophisticated routes and structures to evade taxation.
Why It Matters: While the employee ownership movement has recently gained steam, announcements such as these risk turning off firms from adopting the structure. Increased scrutiny from the IRS is never a welcome prospect, and with an already complex structure some firms may find employee ownership to not be worth the hassle. Further, smaller firms or those without the requisite expertise may fear that they will inadvertently structure their ESOP in a way that could find them in trouble with the IRS.
Go Deeper: Check out the full press release here.