The Trump Organization and its chief financial officer, Allen Weisselberg, pleaded not guilty to tax crimes on Thursday. Experts say the illegal practices the government alleges occurred may be more common among certain types of companies.
The indictment says the Trump Organization and Weisselberg skirted IRS rules by failing to report so-called “fringe benefits,” a form of employee compensation.
Top executives received unreported rent-free apartments, private school tuition, vehicle leases and bonuses, according to the indictment.
These “off the books” executive perks are more likely to happen at private companies like the Trump Organization, said certified financial planner Sharif Muhammad, founder and CEO of Unlimited Financial Services in Somerset, New Jersey.
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Fringe benefit rules
While fringe benefits are considered taxable income, the IRS allows employees to exclude certain perks from income, such as health insurance, dependent care assistance, education reimbursements, employee discounts and more.
Depending on the fringe benefit, there may be rules to ensure a company isn’t favoring executives over rank-and-file employees.
Some companies also offer lifestyle perks, such as vehicles, country club or gym memberships, cell phones or expense accounts, which may or may not be taxable.
Executives may even receive time on a private jet for personal vacations, which is taxable, said Eric Pierre, an Austin, Texas-based certified public accountant and owner at Pierre Accounting.
There are some cases where companies “true-up” fringe benefits for executives, making sure they won’t come out-of-pocket to pay taxes on the perk, he said.
The indictment alleges the Trump Organization covered fringe benefits for Weisselberg and other executives without reporting the perks as wages, tracked through a second set of internal books.
“These guys were playing fast and loose with the rules,” Muhammad said.
Private vs. public companies
Public organizations, such as Fortune 500 companies, have filings with the Securities and Exchange Commission, making it easier to check a company’s disclosures for executive compensation, Pierre said.
“There’s a lot of scrutiny and eyes on that information,” said Muhammad.
Moreover, public companies have guidance from scores of human resource professionals and legal counsel to double-check fringe benefits packages, he said.
Obviously, investors don’t want to hear about some public company running afoul of the IRS,”Sharif MuhammadFounder and CEO of Unlimited Financial Services
“Obviously, investors don’t want to hear about some public company running afoul of the IRS,” Muhammad said.
However, with private companies, like the Trump Organization, there is less public information.
“I don’t want to say it’s the wild, wild west,” Muhammad said. “But there’s a lot of room for people to take liberties with how they treat things like fringe benefits.”
There may also be internal interpretations of how to tax those perks. Some companies may argue they are following “the spirit of IRS rules” without obeying the code line by line, he said.
Of course, there are plenty of reputable firms like hedge funds or private investment companies that are less likely to engage in these practices, Muhammad said.
Advice for companies
When it comes to fringe benefits or “true-up” compensation, it’s always best to rely on guidance from a tax professional.
“And you may need to get a second opinion,” Pierre said.
Fringe benefits are a specialized area of practice, he added. Not every CPA or firm has experience with this type of compensation.
While there are best practices for tracking fringe benefits, companies need to review their perks periodically to stay compliant, Muhammad said.
“You don’t usually see things progressing to the point where people are going to jail,” he said. “But the [company’s] reputational risk is what’s at stake.”