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New IRS Audit Techniques Guide on Nonqualified Deferred Comp: Good News for Section 409A Compliance?

The IRS recently issued its Nonqualified Deferred Compensation Audit Techniques Guide. Practitioners and employers who have been grappling with the complexities and draconian penalties of Internal Revenue Code Section 409A were hopeful that the Guide might shed some light on exactly what the IRS is looking for when a nonqualified plan gets audited. Alas, the Guide provides scant help in that regard.

In essence, the Guide is little more than a primer on the tax implications of nonqualified deferred compensation (NQDC). The usual suspects of constructive receipt and economic benefit are discussed at length long before Section 409A is ever addressed. The Guide also summarizes the early FICA and FUTA inclusion rules.

Ultimately, the Guide provides IRS auditors with the following overarching mandate:

“A NQDC plan examination should focus on when the deferred amounts are includible in the employee's gross income and when those amounts are deductible by the employer…The Examiner should also address if deferred amounts were properly taken into account for employment tax purposes.”

Reading the Guide, one gets the impression that the IRS is more concerned on audit with issues of constructive receipt and economic benefit than it is with strict, technical compliance with Section 409A. If true, this is good news because Section 409A can be so complex. The Guide doesn’t really get around to discussing Section 409A until its last section. There, the Guide tells Examiners: “For current guidance, see final regulations,” while also going on to cite the Proposed Regulations and four Notices. Good luck to any Examiner who is not already familiar with those items.

The Guide provides a good overview of NQDC taxation. The fact that it focuses more on general tax concepts versus the nuances of Section 409A is likely good news. Perhaps it means that IRS Examiners will audit NQDC with an eye toward major tax compliance areas rather than with an eye towards Section 409A foot faults.

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