As the Obama Administration seeks backing for a tax on banks' lucrative pay packages, the Internal Revenue Service has been stepping up its oversight of executive pay through its auditing and other powers.

President Barack Obama needs the U.S. Congress to help him pass the 10-year $90 billion tax on bank executive compensation, but the tax agency had already been bearing down on lavish pay and perks across industries on several fronts.

Next month, the IRS begins an effort to audit 6,000 companies with a focus on their employment policies, including fringe benefits and officers' compensation. The IRS has also taken an increasingly tough stance on deductions companies take for highly paid executives and how deferral of pay by such executives is treated.

The IRS knows that there is considerable noncompliance with regards to employment taxes, said Anthony Arcidiacono, of Ernst & Young, who spent three decades at IRS as an agent.

IRS Commissioner Doug Shulman has made tax evasion by high-wealth individuals and corporations a priority. Last year, the agency formed a new unit to study structures created by high-net worth individuals to avoid taxes.

Obama's 2011 budget proposal, expected early next month, is expected to reintroduce measures to limit corporate tax breaks and rein in use of the tax code by companies to park money overseas to minimize U.S. tax.

The 6,000 exams, to be conducted over three years, will be deeper than typical audits and look at fringe benefits such as executive use of corporate jets, company cars and other reimbursements arrangements, Arcidiacono said.

The examiners have been instructed to leave no stone unturned, he said on a recent call with clients.

The IRS has not taken a systematic focus on employment issues in decades, according to tax lawyers. The agency will examine a cross section of companies by size and industry.

We've had quite a few clients who have had more intensive employment tax and executive compensation audits, in recent months, said Anne Batter, an attorney at Miller Chevalier who previously worked in the IRS chief counsel office, which interprets the tax code.


Also under a microscope are deductions companies can take for lucrative salaries. The law limits such deductions paid to certain top executives to no more than $1 million per year.

This limit does not apply to compensation received for meeting pre-established performance goals. But the IRS has been chipping away at that exception, lawyers say.

The IRS ruled in 2008, for example, that such compensation is not excepted when an executive is entitled to payment even if that person is fired.

Another tax code section in the agency's arsenal, dating to the second Bush Administration, is related to executives' use of deferred compensation to minimize taxes.

In 2004, in the aftermath of public anger when executives of energy trader Enron withdrew deferred compensation before the company went bankrupt, Congress enacted a law that limited deferred compensation.

Companies are slapped with a 20 percent extra tax penalty when the compensation vests if they don't meet the new rules.

Several tax lawyers said it is precisely the wrong time to be discouraging deferred compensation, when the Federal Reserve and others are encouraging the opposite.

The rules have been interpreted in an extremely tight-fisted and unforgiving manner, said Richard Skillman, an attorney at Caplin and Drysdale who worked in the IRS chief counsel office from 1999 to 2002.

Still, the IRS can only enforce current law and needs further action from Congress to dig deeper.

If you go underneath all of it, there is clearly a lot of negative feelings on Capitol Hill about highly paid executives, Skillman said. But there is only so much they can do. They are really charged with not going beyond the law.