The recent conviction of two Trump Organization affiliates this month on tax fraud highlights the tax implications that finance executives and employees need to consider when it comes to fringe benefits, according to Kelly Phillips Erb, a tax attorney and Taxgirl columnist with Bloomberg.
Technically defined by the Internal Revenue Service (IRS) as a form of pay for the performance of service, fringe benefits can run the gamut of perks or benefits provided to employees beyond the salary. They can range from the more common offerings like health insurance, moving expenses and cell phones to flashier items like the use of a company car and even sometimes, the actual car itself.
Underreporting or incorrectly accounting for those extra benefits can put executives and their companies at risk. “This is something that has been on the IRS’ radar for a while, it’s something that is often on the DOJ’s website,” Erb said in an interview. “If you make those kinds of mistakes, whether they’re willful or not, I do think it is something that has been prosecuted and will continue to be.”
In the case of Trump CFO Allen Weisselberg, his benefits included the use of an apartment and a car that wasn’t reported as income, reducing both his and his company’s tax obligations. Weisselberg pleaded guilty in August to taking about $1.7 million in perks and reducing both his and his company’s tax obligations.
Shifting fringe benefit policies
In August a Trump Organization spokesperson characterized the case as unprecedented, asserting that no prosecutor has ever brought a criminal case against a person for failing to report a company car, a company apartment or so-called ‘fringe benefits.’”
That’s hyperbole, Erb said. “You can look at the history of fringe benefits and look who has been caught up in underreporting before and know that it is not true,” she said. People are prosecuted for tax fraud related to fringe benefits and running personal expenses through companies, though typically not at such a high profile company as the Trump Organization, she said. In addition, she said fringe benefit-related fraud often emerges as companies are investigated for larger issues.
Among the most high profile tax cheats in modern history was the late hotelier Leona Helmsley who was convicted of evading $1.2 million in federal income taxes in 1989 stemming from schemes in which millions of dollars of personal expenses ranging from renovations of a Greenwich, Conn. estate to underwear and cosmetics being billed to various Helmsley companies, according to a New York Times report.
To stay on the right side of the law and compliant, it’s important for executives, employees and companies to keep up to date with changing tax laws and policy regarding fringe benefits and other matters, Erb said.
For example, company-provided cell phones were once a taxable benefit. But in 2011 as they became more prevalent, the IRS provided new guidance citing a provision in the Small Business Jobs Act of 2010. It established that when an employer provides a cell phone to an employee primarily for “noncompensatory business reasons” the business and personal use, then the phone is “generally nontaxable to the employee,” according to an IRS release.
When it comes to employees accounting for fringe benefits in the form of gifts from companies, the tax treatment can quickly get complicated. The IRS views most gifts to workers as compensation that should be included as income for tax purposes, Erb wrote in a Dec. 8 column. But smaller non-cash gifts such as chocolates or branded swag that are viewed as having a low or “de minimis” value would be an exception. Still, there’s no official dollar threshold for what constitutes a low value, she wrote.
Two sets of books
Similarly, another area that companies should take care around is having two sets of books. The case against the Trump Organization turned in part on payments that were listed as rental and other expenses rather than as compensation on the company’s general ledger but on an internal spreadsheet the company kept, the expenses were listed as compensation.
There can be all kinds of reasons to do that, Erb said, but typically most people would associate that a company doing so wants different parties to know different things about their firm. At the same time, there are legitimate reasons for presenting information differently, she said.
A company’s “income and the way it is characterized can be different on a return than it looks on the books…but usually those are accounting annotations, you don’t actually physically have two sets of books, you account for it differently,” Erb said. That could mean you have a depreciation schedule that shows the year an asset was put in service and how its depreciated it over time, she said.
Erb also mentioned that even though former President Donald Trump himself would not get prosecuted for the tax fraud, she is seeing a shift where tax prosecutors are holding companies as well as the individuals who make the tax decisions accountable.
For example, the District of Columbia Attorney General earlier this year accused MicroStrategy co-founder Michael Saylor of evading $25 million in taxes by Saylor allegedly claiming he lived in Florida which doesn’t have an income tax, rather than Washington, D.C. in a suit, according to an Aug. 31 CNBC report. The suit also named the company as a defendant.
“It’s important to be really thoughtful about the kinds of advice that you offer and the way you receive and respond to requests from the company,” Erb said. “That’s true whether you’re a CFO or just a bookkeeper. If something doesn’t feel right I think you need to ask questions.”