In Notice 2007-100, the Service established a correction program for certain failures to comply with Sec. 409A (governing nonqualified deferred compensation plans). The correction program provides for the self-correction of certain unintentional operational errors without any penalty if the error is corrected within the same tax year in which the error occurs. For certain errors that are not corrected by the end of the tax year in which the error occurs, the program permits self-correction with limited penalties as long as the amount involved in the error is below a prescribed threshold and the error is corrected by the end of the service provider’s second tax year following the tax year in which the error occurred.
The correction program set forth in Notice 2007-100 is temporary; it provides relief only for errors occurring before January 1, 2010. The IRS invited comments on the program, and the AICPA has submitted recommendations for a permanent correction program.
The AICPA comments make six main recommendations:
1. Extend the deadlines for correcting operational errors;
2. Remove the relatively low $15,500 limit for operational errors not corrected within the tax year;
3. Replace the requirement that operational errors be “unintentional” with an “egregious error” standard;
4. Allow taxpayers other than company insiders to use the self-correction program, even if their tax returns are under IRS examination;
5. Allow certain plan document errors to be corrected; and
6. Allow certain failures with respect to stock rights to be corrected.
The AICPA believes that providing taxpayers with a self-correction program that rewards voluntary discovery and correction of mistakes as early as possible is the best way to ensure the greatest Sec. 409A compliance.