Initiative Gathers Section 409A Data For Compliance Check, IRS Official Says

The Internal Revenue Service's current compliance initiative project was created as a formalized audit program to assess compliance with tax code Section 409A, an IRS official said during a Bloomberg BNA webinar.         

The project follows certain procedures, which Thomas D. Scholz, a senior technician reviewer in the IRS's Office of Division Counsel/Associate Chief Counsel, Tax Exempt and Government Entities, outlined during the July 30 program as follows:

• Fewer than 50 companies have been selected from a population already selected for examination by the IRS's employment tax division. One selection criterion was the probability that the taxpayer would have a nonqualified deferred compensation plan.

• Standardized or model information document requests (IDRs) were created for the project with the intent that all taxpayers would receive substantially the same IDR, with some minor differences. For example, those issued to privately held companies would be slightly different than those issued to publicly traded companies.

• The IDRs focus on three issues: initial deferral elections, subsequent deferral elections and payouts of nonqualified deferred compensation. As part of the examination of the payout, the IRS is looking at compliance with the six-month delay rule for specified employees.

• To reduce the burden on companies selected, the information being requested will focus on the top 10 most highly compensated employees of the taxpayer.

• It is expected that the project will be completed within 12 months. Many taxpayers have started receiving IDRs, so the project should be completed by the middle of 2015.        

Model IDR?          

Helen H. Morrison, principal in the national tax department of Ernst & Young LLP in Washington, said that while the “voluminous” IDRs issued by the IRS in 2009 spread rapidly throughout the community that practices in this area, the current IDRs haven't yet surfaced. She questioned whether the IRS would release a model of the current IDRs and asked Scholz to comment on the purpose of this initiative and how the IRS will use the information collected.         

Currently, there aren't any plans to release a model IDR, Scholz said. The compliance project is “still in the early stages, so it is somewhat difficult to say what information will be gathered and how we will use it,” he said.         

Generally, a compliance initiative project is designed to gauge the level of taxpayer compliance, and that is “what we hope to find with the Section 409A” compliance project, he said. “We hope it will shed some light on challenges to taxpayer compliance,” he said.         

In addition, the taxpayer responses should give some indication of the effectiveness of the IDRs—“did they ask the right questions and were the questions sufficiently precise to obtain the information”—Scholz said.         

Keith E. Ranta, of counsel in the Baltimore office of Jackson Lewis P.C., asked whether the program will be confined to the last three taxable years or whether it will look back to prior years.                 

Scholz said the cases brought into the project were existing employment tax cases, “so whatever years they had under examination for employment tax purposes are most likely what we are going to use for the CIP.”         

“Whether or not it will be expanded to additional years—I just don't know the answer to that,” he said.         

As to whether the IRS would issue a summary of issues discovered in its review of compliance initiative project responses, or a list of some common issues that can be used by employers to self-audit, Scholz said that it's too early to tell. As the project wraps up next year, the chief counsel side will be communicating with the employment tax side “and would be happy to disclose whatever they feel comfortable releasing,” he said.         

Scholz spoke in an unofficial capacity as part of the program, titled IRS' Section 409A Compliance Initiative Project: Audits, Compliance and Correcting a Plan Failure.

Excerpted from a story that ran in Pension & Benefits Daily (7/30/2014).