October 27, 2023

IRS Further Clarifies Current Focus on ESOPs

Director of Publishing and Information Technology

We reported on August 9 that an IRS press release issued that day stated that as part of “an expanded focus on ensuring high-income taxpayers pay what they owe,” it was warning “businesses and tax professionals to be alert to a range of compliance issues that can be associated with" ESOPs. On September 19, we reported that in discussions with Employee-Owned S Corporations of America (ESCA), the IRS clarified that the press release was not an official notice and that the focus was only on a small subgroup of practitioners and a specific ESOP structure used for tax avoidance.

In IRS Clarifies Its Current Focus on ESOP Plans, former NCEO board member David Solomon of Levenfeld Pearlstein, summarizing information in a (paywalled) Bloomberg Law article, provides a new update: On October 16, an IRS deputy associate chief counsel speaking at an American Bar Association virtual conference stated that:

  • The press release intended to convey that the IRS is examining abuse schemes involving high-income taxpayers, consistent with the plan to not target ordinary taxpayers.
  • The IRS did not intend to suggest that it would designate ESOPs or certain ESOP valuations as "listed transactions" for tax avoidance purposes; however, the IRS isn't ruling out entering on that process in the future.
  • The IRS does not intend to start a "wholesale audit" of ESOPs; only high-income taxpayers who escape taxable income will be targeted.