The Trump Organization was fined $1.6 million and former CFO Allen Weisselberg was sentenced to 5 months in jail for tax fraud. The Weisselberg case highlights the risks involved in fringe benefit compliance.
The IRS defines fringe benefits as “a form of payment for the performance of services.” The IRS Employer’s Tax Guide to Fringe Benefits makes it clear that fringe benefits are taxable. It states that “any fringe benefit you provide is taxable and must be included in the recipient’s pay unless the law specifically excludes it.”
Trump CFO Didn’t Report His Fringe Benefits
Trump CFO Allen Weisselberg admitted in court that he reduced his income by the number of unreported fringe benefits. Weisselberg received a Manhattan apartment, two Mercedes Benz car leases, utilities, furniture, parking, and even private school tuition for his grandchildren as fringe benefits. In fact, Mr. Weisselberg admitted to the court that he received roughly $200,000 in fringe benefits during one year alone.
CNN senior legal analyst and former federal prosecutor Elie Honig said of the Weisselberg prosecution, “It’s also a victory of sorts for the Manhattan district attorney. Their theory, now, that part of the income for employees, including Allen Weisselberg, was paid through fringe benefits in order to avoid tax liability – that theory has been vindicated.”
Underreporting Fringe Benefits Can Put Executives at Risk
Underreporting fringe benefits can put company executives at risk. Kelly Phillips Erb, a tax attorney and Taxgirl columnist with Bloomberg agreed with Mr. Honig. “This has been on the IRS’ radar for a while. 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.”
A conniving professional can avoid paying payroll taxes by converting salaried wages into fringe benefits until they get caught. It is crucial for corporate finance executives to constantly review new tax laws and make sure that company fringe benefits policies are aligned with the law.
Establish Clear Taxable Fringe Benefits Policies
There are a lot of gray areas when it comes to fringe benefit reporting. When companies give gifts to employees, are these fringe benefits taxable? The simple answer – it depends. Kelly Erb wrote in a recent Bloomberg Tax column that current IRS regulations state that most gifts to workers as compensation should be included as income for tax purposes. Some gifts are too small to be practically accounted for. In tax jargon, small gifts are “de minimis”, or of minimal value, and are therefore not taxable.
The question remains – where does one draw the line? The Weisselberg case involves $344,000 in taxes over 15 years. A basket of chocolates will likely qualify as de minimis, but $100,000 in fringe benefits does not.
The bottom line: Corporate tax professionals need to establish clear fringe benefits policies before the taxman knocks on the door.
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