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Compensation audits - deferred no longer

27 Aug 2014

The IRS has spoken unofficially about a new audit initiative concerning compliance for deferred compensation. This appears to be the first organised audit initiative specifically geared at Section 409A compliance since the legislation was enacted nearly a decade ago. Taxand USA provides an overview of this legislation.  

Section 409A applies to nonqualified deferred compensation plans, which are defined as any plan that provides for the deferral of compensation other than a qualified employer plan, any bona fide vacation leave, sick leave, compensatory time, disability pay or death benefit plan. A plan must provide for compensation deferred to be paid only upon one (or the earlier/later of several) of the following events:

  • a fixed date
  • separation from service
  • a change in ownership or control
  • disability
  • death
  • an unforeseeable emergency

Non-compliant deferrals will become immediately taxable once vested and hit with an additional tax of 20% plus interest. Accordingly, it is important to correct deferred compensation plans with form or operational failures to avoid employees facing stiff consequences.

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Taxand's Take

Now is the time for multinationals with operations in the US to perform a self-assessment of their deferred compensation arrangements before they are next on the IRS’s audit list. 

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Taxand and IBFD Global Guide to Transfer Pricing 2014

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