Compliance initiative looking for 409A violations, IRS official says

The IRS has launched a compliance initiative project that is checking for violations of the deferred compensation rules under Code Sec. 409A, Thomas Scholz, senior counsel with the IRS Associate Chief Counsel (Tax Exempt and Government Entities), told practitioners during a September 12, 2014 conference on executive compensation tax developments. The project’s purpose is to assess the level of compliance with Code Sec. 409A, Scholz said.

The project is being conducted by the Small Business/Self-Employed (SB/SE) Division’s Employment Tax unit, Scholz indicated. The initial phase is looking at fewer than 50 employers, some public, some private. The compliance initiative project is focusing on the 10 most highly compensated employees for each company. Current examinations are at different stages; according to Scholz, the IRS hopes to finish the project by the middle of 2015.

The IRS has issued information document requests (IDRs) for most of the cases, Scholz said. He did not know whether new cases might be opened under the project. The audits are looking at three aspects of Code Sec. 409A: initial deferrals; subsequent deferrals; and payouts, with separate IDRs for each category.

Andrew Oringer of Dechert LLP said he believed that the IRS was looking for mistakes on plan requirements and administration, rather than addressing complex legal issues on the treatment of compensation. Scholz responded that the project is designed to look at basic issues under Code Sec. 409A, using examiners who may not have a background in the area. Regina Olshan of Skadden Arps LLP, who moderated the discussion, said the lesson is that the IRS will enforce Code Sec. 409A, and that the compliance project, though of limited scope, could lead to broader enforcement action.

Robert Neis, Treasury deputy benefits tax counsel, discussed some guidance projects in the compensation area. There are two related projects, he said: one to issue final regulations on income inclusion under Code Sec. 409A, and one to issue proposed regulations under Code Sec. 457(f). The government is getting close to issuing the proposed regulations under the latter provision. This could happen by the end of 2014, or perhaps in early 2015, Neis said. The IRS and Treasury would like to harmonize the rules in these areas, if practical. Both provisions address a substantial risk of forfeiture, but Code Sec. 409A is more recent and has a tougher definition than Code Sec. 457(f). The government is looking at this carefully, Neis said.

Source: Thomas Scholz, senior counsel with the IRS Associate Chief Counsel (Tax Exempt and Government Entities), speaking at a 9/12/14 conference.

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