IRS Clarifies Its Current Focus on ESOP Plans

The Internal Revenue Service (IRS) recently sought to alleviate concerns regarding efforts to crack down on employee-owned benefit plans. In August 2023, the IRS published a notice IR-2023-144 announcing an “expanded focus on ensuring high-income taxpayers pay what they owe” and warning businesses and tax professionals to be on alert for compliance issues associated with Employee Stock Ownership Plans (ESOPs).

On October 16, 2023, speaking at a virtual conference hosted by the American Bar Association’s tax section, Laura Warshawsky, a deputy associate chief counsel at the IRS, said, “The press release was intended to convey that IRS is looking at some abuse schemes that involve high-income taxpayers, which is consistent with the new strategic operating plan under which IRS will not target ordinary taxpayers.”

Warshawsky said the IRS didn’t intend for the notice to signal its intent to designate ESOPs or certain ESOP valuations as “listed transactions” for tax avoidance purposes; however, the agency wasn’t ruling out launching that “more complicated” process in the future.

According to Bloomberg Law News, Warshawsky also said the IRS doesn’t intend to launch a “wholesale audit” of ESOPs, but that tax regulators will target only high-income employers that escape taxable income by loaning it to their worker participants.

Tax laws remain favorable to ESOPs for business succession when it otherwise makes good business sense. It is important for business owners contemplating an ESOP to follow industry best practices when putting together a deal team for an ESOP transaction and to engage experienced ESOP counsel to help avoid potential challenges.

If you have any questions, please don’t hesitate to reach out to our member of LP’s ESOP team.