IRS Issues a Warning Shot to ESOP Advisors, Founders

Notice to Taxpayers is Heavy on Innuendo, Light on Specifics

WASHINGTON, DC – The Internal Revenue Service today issued a statement suggesting a greater focus in the next year on S-Corp ESOPs and tax compliance, particularly for companies with a parent holding or management company structure and certain owner finance arrangements. While very short on specifics, the IRS communication appears to be driven by aggressive marketing of ESOP plans by some, although the IRS provides no specific examples of where an ESOP has been used in the manner they suggest.

“This is not just disappointing, but alarming, to have this type of communication come from the IRS,” said Jim Bonham, President and CEO of The ESOP Association. “There are only about 500 ESOPs formed every year, and I cannot imagine the scale of activity that would be necessary to justify these kinds of aggressive tactics from the IRS. Sadly, this type of public warning, without substantiated justification, is damaging to American workers who would benefit from the formation of an ESOP at their companies. It risks a chilling effect on a business model that Congress overwhelmingly wants to encourage.”

The IRS notice can be found here.

“ESOPs are not the problem,” Bonham continued. “This looks and feels like an overreach.”

In the agency’s statement, IRS Commissioner Danny 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.”

Bonham added: “We agree that trusted, and experienced, ESOP professionals should be engaged by ESOP sponsors and we actively discourage any attempt to market ESOPs as a way to avoid paying taxes. Our community is very good about policing itself. Our Employee Owners have too much to lose to tolerate risky practices or bad actors.”

The ESOP Association is closely monitoring these developments, and has already begun to engage with lawmakers and oversight committees in the U.S. Congress. The Association will also be seeking information directly from the IRS and the Department of the Treasury to provide more clarity about the IRS’ intentions.

About the ESOP Association 

The ESOP Association is the largest organization in the world supporting employee-owned companies, the more than 10 million U.S. employees who participate in an ESOP, and the professionals who provide services to them. Headquartered at the International Employee Ownership Center in Washington, DC and operating as a 501(c)6 organization with the affiliated Employee Ownership Foundation, The ESOP Association conducts and funds academic research, provides more than 160 annual conferences and events attended by nearly 15,000 individuals, and advocates on behalf of employee owners and their businesses to federal and state lawmakers.

For Media Inquiries, Contact: 

Demetrios Karoutsos
Senior Director, Marketing & Communications 
dkaroutsos@esopassociation.org