IRS Warns of Schemes Tied to Employee Stock Ownership Plans

The Internal Revenue Service alerted businesses and tax professionals on Wednesday of aggressive schemes involving complex or questionable transactions associated with employee stock ownership plans.

“The IRS is focusing on this transaction as part of the effort to ensure our tax laws are applied fairly,” IRS Commissioner Danny Werfel said in a statement.

“This means spotting aggressive tax claims as they emerge and warning taxpayers,” Werfel said. “Businesses and individual taxpayers should seek advice from an independent and trusted tax professional instead of promoters focused on marketing questionable transactions that could lead to bigger trouble.”

With the $80 billion budget boost under the Inflation Reduction Act, the IRS, Werfel said, “is working to ensure high-income filers pay the taxes they owe.”

ESOPs, as the IRS explains, are retirement plans that allow employees to own stock in their employer’s company.

“Any company that has stock can sponsor an ESOP for its employees as long as the ESOP invests primarily in the securities of the employer,” the IRS said. “ESOPs can be complex arrangements since the ESOP can borrow funds from the employer or a third party to purchase shares of the employer.”

In its current compliance efforts, the IRS said that it “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.”