The IRS recently announced plans to conduct payroll tax audits of approximately 6,000 companies and increase its focus on compliance issues relating to section 409A of the Internal Revenue Code of 1986 (“Code”). To be ready for such audits, employers should review worker classifications, fringe benefit polices, executive compensation arrangements and Code-qualified employee benefit plans now.

This will allow companies to make the necessary corrections and mitigate possible penalties and fees that might be assessed in an IRS audit. Critical areas to focus on are: payroll tax practices, section 409A plans and employment arrangements, and Code-qualified 401(k) and defined benefit plans.

Payroll tax: In particular, the IRS will focus on worker classification and fringe benefit policies. Fringe benefits include items such as transportation benefits, education assistance, and employee discounts. . . . Executive and nonexecutive fringe benefit policies and expense reimbursement procedures should be reviewed for any discrepancies that may have monetary implications to the employee or employer in a tax audit.

Section 409A: Code section 409A was enacted in 2004 as a broad-based statutory reform of nonqualified deferred compensation. . . . Employers should review all deferred compensation plans for documentary compliance, as well as review all deferral and/or subsequent deferral elections, potential payment accelerations, and any stock-related awards subject to 409A. These internal reviews may allow a company to proactively correct any problems before an IRS audit.

Qualified plan corrections: A preemptive internal review of all qualified plans may permit employers to correct errors and pay smaller penalties than if these errors are discovered during an IRS audit. In addition, such a proactive approach to plan corrections may be looked at favorably by the IRS if there is an audit at a later date and errors are discovered.

The rest of the story . . . .