Backdating checks irs

Indeed, with more than 80 companies being reviewed by the SEC for potential illegal backdating practices, and one academic study claiming that more than 2,000 companies have engaged in the practice, civil and criminal charges will probably mushroom in the next few months. The purpose of backdating is straightforward: it gives options holders an immediate paper gain, and a real gain once the option is exercised.

A quick examination of the cases against Brocade clearly identifies why backdating is synonymous with fraud, even though no U. The practice involves using hindsight to assign a stock-option contract an earlier date than its actual grant date.

Thus, the civil fraud penalty may be asserted on one spouse only. To prove fraudulent intent, the IRS must demonstrate that the taxpayer intended to evade tax he believed to be due, by showing proof of conduct intended to conceal, mislead, or otherwise prevent the collection of such tax.[ii] Fraud can not be imputed or presumed – the government must prove by affirmative evidence that an understatement of tax set forth on the return is attributable to fraud.[iii] Intent is distinguished from inadvertence, reliance on incorrect technical advice, honest difference of opinion, negligence or carelessness.[iv] RELIANCE AS A DEFENSE.

(In 2004, FAS 123 was revised to require that all stock-option grants be expensed.) Brocade’s crime, charges the Do J, is that between 20, company executives “routinely backdated stock option grants to give employees favorably priced options without recording necessary compensation expenses.” Ultimately, the alleged criminal fraud is a disclosure and accounting issue that violates Section 10 (Manipulative and Deceptive Devices) of the Securities Exchange Act of 1934.

At the Senate hearing, the accountant testified the Philadelphia center printed refund checks dated May 30 to beat the June 1 deadline for refunds even though the checks were not intended to be mailed until June 7 or later.

There is no statute that explicitly outlaws backdating stock-option grants, but it seems virtually impossible to backdate options and achieve the ultimate goal of putting grants “in the money” without first deliberately falsifying documents and then covering up the sham.

The civil suit filed by the SEC also charges securities fraud, citing specific securities-law provisions, including those having to do with books and records, internal controls, misrepresentation to auditors, and Section 302 of the Sarbanes-Oxley Act, which requires CEOs and CFOs to certify the accuracy of financial statements. Recall that in-the-money options are not considered performance-based compensation by the IRS.

That means that if an option is in the money as a result of backdating, the company forfeits its tax deduction for the covered employees, explains Lehman Brothers tax expert Robert Willens.

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