The Internal Revenue Service announced that it would begin its first Employment Tax National Research Project since the 1980s. This Tax Project will include audits of 6,000 companies over the next three years, and is expected to focus review on (among other issues) executive compensation, including deferred compensation arrangements subject to Section 409A of the Internal Revenue Code of 1986, as amended.
In addition, employers are now reporting that the IRS has begun to audit deferred compensation plans for compliance under Section 409A. These audits are being conducted by the IRS as a separate audit project apart from the Tax Project. The IRS has been issuing “Information Document Requests” (IDRs) requiring disclosure of specific information on deferred compensation arrangements subject to Section 409A. These IDRs will be used to determine whether these arrangements are in compliance with Section 409A.
The potential to be audited and the new Section 409A correction program make now the ideal time for sponsors of deferred compensation plans to review their plans for documentary compliance. This is true even for plans that have already been amended for Section 409A, because practitioners' understanding of these rules has evolved over time based on information provided by the IRS. As explained in the article below, the correction program provides incentives to correct plans by December 31, 2011, and will be unavailable if the sponsor comes under audit before correction is made.
The correction program can be found here.