Deferred Compensation - Updated IRS Audit Guide
- June 19, 2015
The IRS recently updated the Audit Techniques Guide that is provided to its agents with respect to deferred compensation programs, including - as the Guide specifies - salary reduction arrangements, bonus deferral plans, supplemental executive retirement plans and other top-hat plans and excess benefit plans, as well as phantom stock plans. The Guide provides useful information on areas of focus for IRS agent during audits. The Guide specifies that an examination of deferred compensation programs should focus on “when the deferred amounts are includible in the employee’s gross income and when those amounts are deductible by the employer.” It also reaffirms the importance of employment taxes in connection with these programs, as these taxes may become due at the time of vesting and not upon payment of deferred compensation.
The audit steps and techniques described in the Guide are also helpful for purposes of adequately preparing for any such audit. The documents that may need to be produced and that are explicitly listed in the Guide, include not only plan documents, but also deferral election forms, individual employment agreements, severance arrangements, board of directors’ minutes, compensation committee resolutions and employee communications. IRS agents are directed to look at SEC filings and service agreements with third-party providers, and of course IRS forms filed by the employer (mostly, Forms W-2) to make certain all reporting obligations have been met and income is recognized at the appropriate time for income tax and employment tax purposes.
Surprisingly, the Guide provides little direction with regard to audit techniques for purposes of assessing compliance with Section 409A of the Code, which governs deferred compensation arrangements, and provides for severe penalties in the event of a violation. For the most part, the Guide refers to existing guidance previously issued by the IRS under Section 409A of the Code. Despite this lack of direction, the Guide is a good reminder that although deferred compensation arrangements come in many shapes and sizes, they all need to be carefully documented. Maintaining good, consistent and comprehensive records is just as important in the deferred compensation area as it is for qualified plans.