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IRS eyes stock options, report says
Newspaper: Tax agency joins SEC, DoJ review of firms that allegedly backdated options; hundreds of millions at stake.

NEW YORK (CNNMoney.com) -- The Internal Revenue Service is the latest agency to look at stock option practices at a growing number of companies, according to a published report.

The New York Times reported Friday that the IRS is checking into whether companies that backdated stock options for executives accounted for the options properly in their taxes.

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The paper said that companies and individuals could face hundreds of millions of dollars from civil penalties, unpaid taxes and interest payments if widespread wrongdoing is found.

The Securities and Exchange Commission and the Justice Department are already looking into stock option practices at dozens of companies. Justice has issued subpoenas to at least 35 companies, according to the report, and last week charged two former executives of Brocade Communications (Charts) with securities fraud, the first charges in the probe.

The Times reports that while backdating options is not necessarily illegal, it can have severe tax consequences separate from potential accounting violations.

The paper reports that ordinary stock options generally qualify for favorable tax treatment, although options issued at a discount to the market price do not have that advantage. If a stock option is backdated to give the executive a better price than at the time of the original grant, it could change its tax treatment.

"If these companies have been deducting huge option grants that they actually couldn't deduct, that seems like a big pile of money out there," tax attorney Larry Langdon, a former IRS commissioner, told the newspaper.

IRS officials are reviewing the files of 30 to 40 of the companies that have publicly disclosed problems, according to the report.

The tax agency assembled a five-member task force to oversee its examinations about two months ago, the Times reports, and in the last few weeks, the agency's corporate auditors were directed to look into potential tax issues as dozens of companies have come forward.

The paper reports that Internal Revenue Commissioner Mark Everson called on them to "consult closely with the SEC to determine which companies merit scrutiny."


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