In case you were wondering (in your spare time), the IRS now has a techniques guide for auditing equity compensation. The “guide” is actually an instruction to internal IRS auditors on how to evaluate equity compensation during an “examination” (fancy word for “audit”). The guide, published in August 2015, is available on the IRS web site. I’ll try to summarize some of the more interesting points in today’s blog.
The Angles of Audit
Before I dive into what the guide says, I want to cover a thought that came to me as I was reading the guide. Stock Plan Administrators and their vendors are focused on tax compliance relative to the company’s corporate tax obligations (reporting, withholding, etc.). However, it’s important to remember that as compliant as we may be from a issuer standpoint, there is still audit exposure potential from the individual angle of tax compliance. An employee may get audited, even if the company is not being audited. The company’s documentation may be requested from the IRS as part of that audit. It’s important that issuers are aware that there are a variety of audit angles that could attract attention to their equity compensation record-keeping and disclosures at any given time, and the IRS guide seems to support that thought – providing detailed information on the types of transactions and potential tax issues that could arise. With that detail comes guidance on how to source documents attached to equity compensation. According to a blog dedicated to explaining the guide by Porter Wright Morris & Arthur LLP,
“Interestingly, the Guide devotes a fair amount of detail to explaining where auditors may find these documents, encouraging them to review Securities and Exchange Commission (“SEC”) filings as well as internal documents. As such, the Guide serves as an important reminder to employers to be mindful that the IRS (or other third parties) someday could seek to review their corporate documents. ”
Documents Galore
Let’s cut to the chase. Where are auditors instructed to look?
SEC documents – This is an obvious one, but it’s where the IRS recommends their auditors start. Disclosures such as the 10K (Form 10-K), proxy statement (DEF 14A) and Section 16 reports of changes in beneficial ownership (Form 4) are places to identify types of plans and awards, as well as detailed compensation data for named executive officers and directors. The IRS recommends comparing data from these disclosures to individual Form W-2s and 1099-MISCs to verify proper tax withholding and reporting. If discrepancies surface, the IRS recommends expanding the audit (yikes).
Internal Documents – Types of internal documents subject to scrutiny include employment contracts, and meeting minutes from Board of Director and Compensation Committee meetings.
The Porter et al blog summarized this into some key awareness factors for employers:
“Employers should be aware of these instructions. Often times, it is easy for someone to prepare internal documents using jargon or short-hand that is familiar among people at the company but that may be difficult to explain to a third party or worse could be misleading. The Guide demonstrates that internal documents may not be restricted to internal personnel. Instead, the IRS very well could review these internal documents. As such, employees and advisers who prepare these documents should be mindful of both the information contained in the documents and how they present that information.”
Takeaways
When preparing documentation or disclosures (including supporting documents for those disclosures), it’s good to look at the process as if a third party will eventually come in and evaluate the information. The Porter blog made a great point – often times records are maintained in manner that internal parties may easily understand, or there’s someone on hand who can “interpret” that scrawl made by a board member. However, once that information is subject to review by an auditor, questions can arise. Companies should be aware of the IRS audit instructions relatives to equity compensation and maintain their records in a way that will make it easy to explain if audited.
It’s been a while since we’ve had major regulatory updates that impact stock compensation. Knowing that, I sometimes find myself scanning the horizon, looking for the next “thing” that’s going to have us examining our practices, changing procedures or implementing something new. This week my radar went into action when I heard that SEC Chair Mary Jo White had laid out quite a list of upcoming initiatives in a recent address.
Technology on the Brain
In spite of some significant cutbacks in technology dollars available to the SEC for long term initiatives, the SEC seems to still have advancement in this area on the brain. Chair White announced that the SEC has deployed a new analytical tool called “NEAT” (National Exam Analytics Tool) to help identify possible insider trading or other misconduct. This tool can identify red flags in a fraction of the time it took to do so in the past. I’m guessing this means that the wave of insider trading investigations and scrutiny is not over.
In the spring of 2013, the SEC issued guidance permitting issuers to use social media sites to communicate company announcements (see the NASPP Blog, May 16, 2013). White has now indicated that the SEC is broadly rethinking disclosure requirements for public companies and the role of technology in sharing information with investors. Last month the SEC recommended to Congress in a report (which was mandated by the JOBS Act) that the disclosure rules undergo comprehensive reexamination and reform. White shared some insight into the SEC’s thinking: “I believe we should rethink not only the type of information we ask companies to disclose, but also how that information is presented, where and how that information is disclosed, and how we can take advantage of technology to facilitate investors’ access to information and make it more meaningful to them.” Saying it and issuing a report doesn’t mean new rules are imminent, but it is perhaps a hint of things to come. It seems within the realm of possibility that this type of reform may be fairly significant if and when it happens.
New Investigation Focus
White says that as the SEC wraps up investigations stemming from the financial crisis, attention is now shifting to other areas of enforcement – namely financial reporting fraud and accounting irregularities amongst others. This is a good time to make sure our controls, checks and balances are operating full force. While we can’t control other areas of financial reporting beyond stock administration, we can ensure that the areas under our realm can stand up to the possibility of an intense audit or investigation. This seems particularly wise, since Chair White also said that “The coming year promises to be an incredibly active year in enforcement, as we continue to vigorously pursue wrongdoers and bring enforcement actions across the entire industry spectrum.”
It looks like the SEC continues on their roll of assertive enforcement actions and attempt to progress into more modern times. Let’s see what the horizon holds in that regard.
Many companies have settled into a routine when it comes to furnishing information statements and filing the IRS returns required under Section 6039 of the Internal Revenue Code. Whether you have a solid routine, or this is the first time you’re facing Section 6039 compliance, there are a few areas where companies should verify that they are fully satisfying 6039 requirements as they near the deadlines for 2013 tax year reporting.
Review Non-U.S. Employees
Non-resident aliens who do not receive a W-2 are not subject to Section 6039 reporting. If a non-resident alien does receive a W-2, then 6039 statements would also need to be furnished.
U.S. citizens who are working abroad are subject to Section 6039 reporting, so companies should not rely on address filters alone to determine whether or not an employee should receive an information statement.
Implement a New ESPP?
Did your company implement a new ESPP recently? It’s important to note that the trigger for filing Form 3922 (for ESPP shares) is the first transfer of legal title for the shares, not the purchase or exercise of the shares. The moment of first legal transfer includes the deposit of shares to a brokerage account in the employee’s name upon purchase, like many companies do via a captive broker. If you had ESPP purchases in 2013 and deposited purchased shares immediately into a brokerage account for the employee, then you’ll need to report the transaction(s) this season. Note that issuances into book entry at a transfer agent or in certificate form do not constitute a legal transfer of title. Those shares would be reported once deposited to a brokerage account, gifted, or sold. Of course, this doesn’t only apply to new ESPPs, but most companies with existing ESPPs are already aware of this requirement. It’s possible that those implementing a new ESPP may overlook this “first legal transfer of title” requirement if not looking at the nuances carefully.
More Transactions this Year?
The IRS doesn’t require companies to file 6039 returns electronically unless there are 250 or more of them. The 250 number is per form type, so if you have 251 Form 3921 returns and 249 Form 3922 returns, only the Form 3921 returns need to be filed electronically. For quantities less than 250 per form type, companies may elect to file electronically or via paper. Even if you didn’t have to file electronically in the past, you’ll want to look at each year’s quantities anew to make sure you’ve assessed the threshold correctly. The deadline for paper filings is February 28, 2014. The deadline for electronic filings is March 31, 2014.
No Chump Change for Failures and Mistakes
Failing to furnish information information statements is no laughing matter. The IRS penalty for not furnishing an information statement, or, for providing an incomplete or incorrect statement to a participant is up to $100 per statement. In addition, a separate penalty is assessed for issues with 6039 returns that should be filed with the IRS – up to $100 per return for those not filed or incomplete/incorrect returns. As a result, you’ll want to make sure you are really auditing the entire process – even if it’s outsourced, to ensure there are no failures. There is a cap of $1.5 million on each penalty type, but that’s high enough to want make doubly sure that the proper reporting is done accurately and timely.
For more information, the NASPP has an excellent Section 6039 portal, available on our web site.
The PCAOB has proposed standards requiring auditors to assess whether compensatory arrangements held by executive officers create risks of material misstatements. According to Steve Seelig in Towers Watson’s Executive Pay Matters blog (“Does New PCAOB Proposal Really Eliminate the Risk of Auditor Involvement in Executive Compensation Design?,” May 30, 2013), the focus is on “the potential for incentive compensation program structures to create incentives for executive officers to exaggerate gains or minimize losses.”
This a re-proposal of a proposal from 2012. According to the PCAOB, the redraft is designed to make it clear that the auditor isn’t required to assess the reasonableness of the compensation. Steve, however, doesn’t see much difference between the two proposals and based on the comparison he includes in his blog, I don’t see much difference either. To be honest, they both seem fairly inscrutable to me.
Are You Going to Get to Know Your Auditor Even Better?
While there’s the potential for any type of compensation to incent executives to make the company’s financial condition look better than it is, this is particularly a concern with stock compensation, where the value delivered to the exec is driven by the stock price, which, in turn, is driven by the company’s financial performance. Thus, this is potentially something new that auditors will be focusing on when they review your stock compensation programs. The PCAOB proposal calls for auditors to read the related compensation contracts (this would be the grant agreements and any other related documentation for stock awards) and also to read the disclosures in the company’s proxy statement and other public filings.
My first thought is “aren’t the auditors already reading those things?” Probably they are (aren’t they?), but maybe not with a focus on whether the arrangements create risk that execs will be incented to misstate the company’s financials.
But given what many stock plan administrators have told me about their auditors–i.e., their auditors are often fresh from the CPA exam with little to no understanding of stock compensation–I also have to wonder whether the auditors are really capable of making this assessment. It seems unlikely that someone who doesn’t understand what the exercise price of an option is will understand the nuances in financial risk inherent in, say, an option vs. restricted stock, and how clawback provisions and holding requirements might be used to mitigate that risk. Steve is concerned that auditors “may develop bright-line rules on what compensation programs are risky or not,” which seems like a reasonable concern to me.
Light Reading
If you are looking for some light summer beach reading, well, this PCAOB proposal sure isn’t it (however, I do recommend “Let’s Pretend This Never Happened” by Jenny Lawson–perfect summer reading and nothing to do with stock compensation). The whole thing (the PCAOB proposal, not the Jenny Lawson book) clocks in at 203 pages and includes sentences like “In the fourth bullet, delete the period (.) and add a semicolon (;) at the end of the bullet.” Seriously?
On the other hand, if you can wade through the proposal, (1) you are a better person than me, and (2) you have until July 8 to submit your comments to the PCAOB.
In a flurry of acronyms, the DOL (Department of Labor) and the IRS (I’m sure you all know what this acronym stands for) signed an MOU (Memorandum of Understanding) to improve agency coordination to address worker misclassification. A number of states are also participating in the agreement.
DOL and IRS Sign MOU The agreement provides that the DOL will share information with the IRS and the participating states to address workers classified as contractors that should really be treated as employees. Worker misclassification is a target of the IRS’s current employment tax research study, which I’ve blogged about before (“IRS Auditing Stock Compensation,” June 7, 2011). This MOU will give the IRS additional information to use in its audits.
At the same time, the IRS also announced a voluntary worker classification settlement program, further demonstrating their focus on this issue.
Misclassifying a worker that should be an employee as a consultant can result in a host of legal issues, from benefits that the individual should have been accorded (such as the right to medical benefits and vacation time), tax withholding considerations, overtime pay, and unemployment benefits, to name just a few.
This probably seems like a topic that doesn’t impact stock plan administration that much. Worker classification is determined by HR and/or payroll; the stock plan administration group most likely just assumes their determination is correct and treats each individual’s options and awards accordingly. And, I can’t think of any reason why stock plan administration should question the classification made by HR/payroll; it’s unlikely you have sufficient information to determine an individual’s employment status.
But, while stock plan administration may not be involved in classifying workers as employees or consultants, you should be aware of the impact misclassification can have on stock compensation awarded to the individuals in question.
Tax Withholding on Options and Awards
Of course, the first issue that comes to mind is tax withholding. Individuals classified as consultants aren’t subject to tax withholding. If these individuals should have been treated as employees, however, then taxes should have been withheld on all of their compensation, including their NQSOs and stock awards. Failure to withhold the appropriate taxes can result in penalties to the company up to the amount of the taxes that should have been withheld, as well as interest and administrative penalties.
In addition, the company should have made matching FICA payments on all of the individual’s compensation, also including NQSOs and stock awards. This is even more of a mess because consultants don’t pay FICA, they pay self-employment tax, which is equal to both the individual and company portion of FICA. The misclassified workers will have overpaid their taxes because, as employees, they would only have been responsible for the employee portion of FICA.
ESPP
The company’s Section 423 ESPP is a significant concern. By law, substantially all employees of the company have to be allowed to participate in the ESPP, but, of course, also by law, consultants aren’t permitted to participate. Where consultants should have been treated as a employees, however, it is likely that they should have been permitted to participate in the ESPP. Where an individual that should have been allowed to participate is excluded from the ESPP, the entire offering(s) that the individual should have been allowed to participate in can be disqualified. A mistake here could impact not just the misclassified individual but all other employees participating in the ESPP. When assessing your company’s risk with regards to worker misclassification, this is an important consideration.
Thanks to McGuireWoods for the alert that gave me the idea for this blog entry.
Conference Hotel Almost Sold Out The 19th Annual NASPP Conference is quickly approaching and the Conference hotel is nearly sold out. The Conference will be held from November 1-4 in San Francisco. The last Conference in San Francisco sold out a month in advance–and that was without the reality of Dodd-Frank and mandatory Say-on-Pay hanging over our heads. With Conference registrations going strong–on track to reach nearly 2,000 attendees–this year’s event promises to be just as exciting; register today to ensure you don’t miss out.
NASPP “To Do” List We have so much going on here at the NASPP that it can be hard to keep track of it all, so I keep an ongoing “to do” list for you here in my blog.
The NASPP’s own Robyn Shutak, along with Jim Vincent of E*TRADE & Leigh Vosseller of Genoptix, gave one of the top presentations I’ve seen on reconciliation best practices. Someone in the audience asked a very fabulous question…what exactly is this tick and tie everyone keeps talking about?
So, here it is, the tick and the tie as it relates to stock plan administration. The term tick and tie (or tic and tie) is a staple for CPAs and other financial or audit professionals. In the most general terms, it’s the numbers equivalent of “dot your i’s and cross your t’s.” I have absolutely no idea where it originated, but at this point it is commonly used to refer to the financial audit process. But, there are some tick and tie steps that can apply to any audit you are conducting in stock plan administration that make it easier to validate your conclusions.
Summarize
When you are conducting a reconciliation, you will be confirming two or more independent sources of data. If you are using Excel to reconcile or present the audit data, it’s best to consolidate the independent sources onto separate sheets within one Excel file using one sheet for each source. Then, on a completely separate Excel sheet, you can create a summary data from each source, effectively proving that the sources all match. It is from this summary data that the tick and the tie come into play.
Tie
Taking the phrase back to front, I’m going to start with tie. Each field on your summary sheet should point back to the original source. For example, let’s assume that have 50,000 shares granted to employees in a specific cost center and you are confirming that between your approval documents and the stock plan administration database. Rather than typing in or copy/pasting the numbers, you actually point back to the field on another sheet where that total is housed. This helps prevent manual mistyping and also provides quick tracking for anyone reviewing the reconciliation.
For better clarity, you can use the comment field to confirm where the data originates or any other information that an auditor might need to know about the data. For an electronic or soft copy review of the data, you can leave the comment field hidden. For a hard copy review, you can make the comment field viewable so that someone looking over the data can tie it back without having to think about where to go.
Tick
I am taking a bit of poetic license with this part of the phrase so that it fits a good reconciliation and audit process for stock plan administrators. I think of this as being verifying the validity of data in the reconciliation. Any good reconciliation process includes a final audit by someone who did not contribute to the original data. So, first, there should be a checklist of each essential part of the data that must be reviewed. The person, or people, involved in creating the reconciliation should verify that each item has been reviewed. Then, the person validating the reconciliation should run down the same checklist and sign off on it.
Full Emersion
Now that you’ve stepped into the world of finance, get the full picture with the NASPP’s Financial Reporting for Equity Compensation course that begins on July 14. Learn all the ways that equity compensation data impacts your company’s financial statements in five weekly sessions lead by leading accountants, valuation practitioners, and seasoned stock plan professionals.
In late 2009, the IRS announced a major audit initiative for executive compensation that will ultimately involve at least 6,000 companies (see “IRS Audits: Are You Ready to Rumble?” January 26, 2010). We’re now over a year into that project, so I thought it might be a good time to revisit the subject.
No Need to Be Surprised
If you’ve been wondering what the IRS might audit relating to stock compensation, it turns out that there’s no need to be surprised. The IRS explains what they are looking for relating to stock compensation on their website. Here are a few highlights of what you can expect IRS auditors to investigate:
In the case of restricted stock and units, whether there has been a transfer of property (e.g., does the employee have voting and/or dividend rights) and whether there is a substantial risk of forfeiture for the award. According to Stephen Saxon in the March issue of PLANSPONSOR (“Saxon Angle: Audit Trials“), companies that offer accelerated vesting upon retirement should be especially wary of this issue for their retirement-eligible employees.
Whether ISOs and ESPPs meet the statutory requirements, especially the $100,000 and $25,000 limitations.
Whether income has been properly reported (on Form W-2 or Form 1099-MISC) and taxes withheld (if required) on all types of stock plan transactions.
Whether tax withholding for stock compensation has caused companies to exceed the $100,000 next-day deposit threshold that Rachel blogged about a couple of weeks ago (“Timely Tax Deposits,” May 26), and, if so, if companies complied with the deadline.
Recordkeeping practices relating to grants, exercises, and other stock plan transactions.
Compliance with Section 162(m)–but that’s a topic for another blog.
Things I Sure Hope Won’t Be a Problem
There are a few items highlighted in the IRS’s audit instructions that I sure hope won’t be a problem for any NASPP members–I know you are all too smart to fall for these traps:
Back-dated stock options. No explanation needed on this one.
Transfers of options to a related party. Under this strategy, an executive would “sell” stock options to a family member or trust in exchange for an unsecured, long-term, balloon payment obligation (essentially, the related party just “promises” to pay the executive for the stock option at some point in the future, a long ways in the future). The idea was to get around the gift tax that could apply if the option were simply transferred to the family member/trust. This type of a arrangement has been a no-go with the IRS for some time.
Not issuing stock upon same-day-sale exercises of an ISO or ESPP. Although the tax code itself is not clear, the IRS’s audit instructions specifically state that if, rather than issuing stock on a same-day sale, the underlying shares are simply cancelled in exchange for the spread–in other words, a net exercise–the arrangement is subject to withholding for both income tax and FICA purposes.
Issuing loans to executives for option exercises and then later forgiving or reducing the loans. Public companies shouldn’t be issuing loans to executives at all, much less forgiving those loans.
Last Chance to Qualify for Survey Results This week is your last chance to participate in the NASPP’s 2011 Domestic Stock Plan Administration Survey (co-sponsored by Deloitte). Issuers must complete the survey by this Friday, June 10, to qualify to receive the full survey results. Register to complete the survey today–we’ve already extended the deadline once, we can’t extend it again!
NASPP Conference Program Now Available The full program for the 19th Annual NASPP Conference is now available. Check it out today and register by June 24 for the early-bird discount–this deadline will not be extended.
NASPP “To Do” List We have so much going on here at the NASPP that it can be hard to keep track of it all, so I keep an ongoing “to do” list for you here in my blog.
Register for 19th Annual NASPP Conference (November 1-4 in San Francisco). Don’t wait; the new early-bird rate is only available until June 24.
Participate in the NASPP’s 2011 Domestic Stock Plan Administration Survey (co-sponsored by Deloitte, with survey systems support provided by the CEP Institute). You must complete the survey by June 10 to qualify to receive the survey results.
As of June 15, 2011, SAS 70 is being replaced as the U.S. auditing standard for service organizations. Today, I explore some of the background for a SAS 70 report and why it’s being superseded.
Acronym Soup and Background Information
The Auditing Standards Board (ASB), which is a part of the American Institute of Certified Public Accountants (AICPA), issues guidance for auditors including the Statements on Auditing Standards (SAS). SAS No. 70 (SAS 70) is specifically guidance for auditors to use when “auditing the financial statements of an entity that uses a service organization to process certain transactions.” (See the AICPA site for more information.)
Section 404 of the Sarbanes-Oxley Act requires public companies to report on the effectiveness of the internal controls relating to their financial statements. The Public Company Accounting Oversight Board (PCAOB) issued Auditing Standard No. 2 in 2004–superseded by Auditing Standard No. 5 in 2007–which identified how the independent auditor evaluating a public company may rely on a “service auditor report” like the SAS 70 Type 2 report. The process breaks down like this:
An independent auditor for an issuing company must evaluate the controls that are in place to ensure the accuracy of financial reporting. If that company outsources administration processes that could impact financial reporting, the independent auditor should evaluation the controls in place at the service provider as well. A SAS 70 report can provide the necessary opinion of not only that the controls are suitably designed (i.e., a Type 1 report), but also that service company has effectively maintained each of those controls over a period of time (i.e., a Type 2 report). The issuing company auditor is, therefore, able to review the information in the Type 2 SAS 70 report instead of assessing the service provider’s internal controls directly. This saves a huge amount of time, money, and energy for both the issuing company and the service provider. The SAS 70 report has become a standard request for companies evaluating or using third-party stock plan administration service providers.
SSAE 16
The Standards on Standards for Attestation Engagements No. 16 (SSAE 16) replaces SAS 70 as of June 15, 2011. The new standard is intended to bring U.S. auditing practices more in line with the international standard, ISAE 3402. Like SAS 70, SSAE 16 consists of a Type 1 and a Type 2 evaluation, Type 2 being the necessary follow-up to determine if controls are being effectively performed over time. Companies with a current Type II SAS 70 report may transition directly to the Type 2 SSAE 16 report. You can tell the essential difference between SAS 70 and SSAE 16 in their names alone. SAS 70 is an audit standard that requires only the auditor’s assessment of controls. SSAE is an attestation standard that requires the company to also demonstrate the effectiveness of controls. SSAE 16 requires management at a service organization to provide not just a description of the controls in place, but of the system as a whole. (SAS 70 only requires a description of controls.) In addition, management must attest to the suitability of the system in a written statement that includes a description of the criteria used to make this assertion and the risks that could threaten the company’s ability to effectively maintain the system.
A Little Appreciation, Please
If you’re at an issuing company and the SAS 70 report is something you ask for–or better yet, something you automatically receive–from your stock plan administration service providers, I think it’s time to take a moment to appreciate the effort that’s going to go into the new standard. When you do get your hands on that SSAE 16 report, give it a good look before you pass it on to your auditors. It will give you some serious insight into what controls your service provider feels are essential, which can help you design some of your own internal controls. It can also shed light on what procedures you may need to update in order to help your service provider achieve the control objectives in the report, which in turn helps your company get through that portion of your audit.
Today’s blog looks at a couple of random topics that showed up in my recent Google alerts: 1) options backdating and lawsuits against auditors and 2) yet another study on stock options and employee performance.
Are Your Auditors Going to Get Fussier? Option backdating stories are few and far between these days, but a new development showed up in my Google alert this week. A federal appeals court has ruled that investors can move forward with a lawsuit against Ernst & Young over Broadcom’s option backdating scheme. The ruling reverses a lower court decision dismissing the case.
The lawsuit alleges that Ernst & Young should have investigated deficient and missing documentation relating to Broadcom’s option grants. At this point, the lawsuit has a long way to go–the ruling just allows the suit to proceed, there has been no finding or judgment against E&Y and perhaps there won’t ever be. Nevertheless, I think it’s intriguing that the lawsuits over option backdating have now extended to auditors. I’ve talked to many a stock plan administrator who has felt a bit put upon with respect to the documentation requested by their auditors, and that was before the options backdating scandal. I imagine the documentation requests have already gotten more onerous and, if this lawsuit goes much further, I can only anticipate that auditors will tighten up the documentation requirements even further.
Stock Options=Lottery Tickets=Grateful, Hardworking Employees The debate over whether stock options incent employee performance slogs on. The latest rebuttal is the paper, “Stock Option Exercise and Gift Exchange Relationships: Evidence for a Large US Company” by management professor Peter Cappelli and Martin J. Conyon, senior fellow at Wharton’s Center for Human Resources.
The study posits that stock options motivate employees to work harder, but not in the way employers most likely hope. Instead of working harder to increase the stock price before they exercise, employees view options more like lottery tickets. But, if they get “lucky” and are able to exercise for a profit, employees will work harder in the period following their exercise–often for over a year–in gratitude to the company for the payout they received.
The study examined exercise patterns and job performance of 4,500 managers at a large U.S. public company (unnamed). While the sample size of employees certainly seems large enough, the results would be more interesting to me if the study had looked at more than one company. The authors don’t seem to acknowledge the differences that education (both in terms of the stock plan and company financials) and corporate culture might have on how employees view their stock options and how that influences their performance. It would also be interesting to know if the results translate to restricted stock or RSUs, which guarantee a payout to employees.
It’s Not Too Late for the Online Fundamentals The NASPP’s acclaimed online program, “Stock Plan Fundamentals,” began last Thursday, April 14, but it’s not too late to participate. All course webcasts have been recorded and archived for you to listen to at your convenience. This is a great program for anyone new to the industry or anyone preparing for the CEP exam. Register today.
Online Financial Reporting Course–Only Two Weeks Left for Early-Bird Rate There are only two weeks left to receive the early-bird rate for the NASPP’s newest online program, “Financial Reporting for Equity Compensation.” This multi-webcast course will help you become literate in all aspects of stock plan accounting, including the practical considerations and technical aspects of the underlying principles. Register by April 29 for the early-bird rate.
NASPP “To Do” List We have so much going on here at the NASPP that it can be hard to keep track of it all, so I keep an ongoing “to do” list for you here in my blog.
Register for 19th Annual NASPP Conference (November 1-4 in San Francisco). Don’t wait; the early-bird rate is only available until May 13.
Register for the NASPP’s online Stock Plan Fundamentals program. Don’t wait–the course started last Thursday, but all webcasts are archived for you to listen to at your convenience.
The IRS began its Employment Tax National Research Project (NRP) this year (See our January 26th blog entry), auditing 2,000 randomly selected companies. Soon, the next 2,000 will be receiving their notices that they have been selected for 2011. In totally, the IRS will audit 6,000 companies over three years. This NRP comes on the heels of similar studies conducted on Subchapter S Corps in 2003 and 2004 and individual taxpayer returns from 2006 to 2008 returns). All are part of a Department of the Treasury’s commitment to provide updated estimates of the “tax gap” (i.e.; the difference between the taxes owed and the taxes actually collected). A full description of the efforts is included in the Update on Reducing the Federal Tax Gap and Improving Voluntary Compliance.
Don’t think that if you aren’t selected, you’re totally off the hook. These are just the random audits as a part of the evaluation process. Not only are regular tax audits still taking place, the results of the NRPs will be used to help identify which individuals and companies to target for regular audits and what areas of audits are most likely to result in the discovery of noncompliance.
The current NRP will focus on four main issues: fringe benefits, worker classification, executive compensation, and payroll taxes. The stock plan management team won’t have much, if anything, to do with an audit of fringe benefits. Worker classification (i.e.; determining if there are consultants who should be classified as employees) could spill over into stock plan administration. A quick review of your company’s policy on granting to nonemployees and an audit of the database to identify grants to nonemployees will help your company make a full assessment of classifications. Executive compensation sounds like an area that stock plan management would be involved in, but actually the main focus will be on owner-officers and the particular audits in this area may not apply to most corporations. So, the area where the stock plan management team can provide the most assistance is payroll taxes.
Payroll Taxes
At this point, you should already have a regular, at least annual, audit of your tax withholding and remitting policies that helps you identify areas of potential noncompliance. The NRP only increases the risk of your company being audited, but compliance should be a serious focus, regardless. Here are my top areas to review before the new year:
Timing of Tax Deposits
Social Taxes
Mobile Employees
ISOs and 423 ESPPs
162(m) and 409A Compliance
Why Now?
If you uncover areas where the company is not withholding correctly on equity compensation, the beginning of the calendar year is the perfect time to implement new withholding practices. This is especially true for mobile employee withholding and if the change will be prospective only
How Far Should You Go?
When you do identify an area that your company has been out of compliance with, the big question is whether to make policy changes that are prospective or retrospective. Even if you aren’t going to be changing retrospectively, it’s a good idea to at least audit back a minimum of three years, but no specific length of time is appropriate across the board. For example, if you discover that you haven’t been making timely tax deposits, there isn’t a way for you to go back in time and make them any earlier. But, you can go back and audit the instances of noncompliance to help give your company an idea of what fees could result from an audit.
States, Too!
The federal government isn’t the only one with a tax gap to close; states are also looking to find lost tax revenue. What’s more, the IRS has reciprocal agreements with many states to share audit findings. That means that if you are audited by the IRS as part of the NRP or as a regular audit, state and local tax authorities may not be far behind.