Audit America: In-House Counsel Prepare for Section 409A Review

The Internal Revenue Service (IRS) announced in September 2009 that it would conduct random payroll tax audits of 6,000 companies. The audits will include a focus on compliance issues relating to Section 409A of the Internal Revenue Code of 1986. The IRS enacted Section 409A in 2004 to reform nonqualified deferred compensation that is earned during a taxable year but might be payable in a later taxable year.

"It's not clear when the audits will start, but they will be ongoing over three years," says Scott Landau, a partner at Pillsbury Winthrop Shaw Pittman. "The pressure on the IRS to collect taxes that have previously fallen between the cracks as well as the current focus on executive compensation by Congress, the Treasury Department, the Securities and Exchange Commission, and the press has put the spotlight on employee-related tax issues."

And the devil could be in the details. The IRS focus on fringe benefits, for example, could include audits of such minutiae as transportation perks, education assistance and even employee discounts.

"Employers should review all executive and nonexecutive fringe benefits and expense reimbursement policies and procedures for any discrepancies that could have monetary implications for the company or its employees in an audit," Landau says.

To deal with these issues, lawyers are advising employers to review all deferred compensation plans for documentary compliance, all deferral elections, potential payment accelerations and any stock-
related awards subject to Section 409A.

"It's also important to affirm the integrity of the process," Landau says. "Employers should ensure that there has been a proper delegation of authority from the board through to the HR team, that roles and responsibilities have been properly defined, what the materiality thresholds will be and how the decision-making process will work going forward."


Julius Melnitzer

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