Tax Update

Be Prepared: Increased Effort by IRS to Audit Compliance with Section 409A

The IRS has recently initiated tax audits focused on whether certain deferred compensation arrangements comply with the requirements of Section 409A. The IRS is initially focusing on the 2006 tax year--a year in which the complicated Section 409A transition rules were applicable. There is substantial uncertainty as to how the transition rules should have been applied, both in form and operation, to a taxpayer’s compensation arrangements.

A taxpayer is urged to seek counsel familiar with tax controversy matters if the taxpayer receives an Information Document Request (IDR) with respect to any executive compensation matter, and especially with respect to Section 409A. It is essential that taxpayers understand the significance of the questions posed by the IDR and the consequences of responses to such IDR prior to responding.

Please contact any member of our Employee Benefits and Executive Compensation Section or Tax Controversy Section for counsel, assistance and suggestions regarding compliance with the Section 409A requirements.

IRS Circular 230 Disclaimer: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.