Bad news for companies that thought their headaches related to Section 409A were behind them. While the struggle to comply with the onerous provision may be under control, they could face questions about their compliance during an audit.

The thicket of rules that governs deferred compensation arrangements, at the risk of severe tax consequences to employees, became effective Jan. 1, 2009. The final regulations were issued by the IRS in 2007.

Some companies undergoing audits have already received Information Document Requests from the Internal Revenue Service asking for details about pay practices that may be subject to Section 409A, Michael Melbinger, chair of the employee benefits and executive compensation practice at Winston & Strawn, tells Compliance Week.

One company received an IDR with 15 questions—some with as many as four sub-questions—seeking detailed information and document production, and in some cases, legal conclusions.

"Companies that aren't 100 percent certain of their 409A compliance ought to be very worried, because the level of detail they're asking for is incredible," says Melbinger.

Complicating matters is the fact that the requests seek information about the 2006 tax year—before the final rules were even issued—and about employees at all levels, not just senior executives.

"Since that was before the final regulations came out, everyone was still sort of guessing about what was going on," says Melbinger. "The penalties for violations are very severe and they're against the employees, which will involve re-filing returns, so companies can't just say pay a penalty and fix it."

Melbinger says even companies that are seemingly well-prepared have had situations where "something came out the woodwork."

"A lot of things happened in the real world that went under the radar when companies were correcting documents last year," he says.

If they haven't already, he says companies should compile a list all of their plans that are subject to 409A and a list of all of their specified employees. Then, companies should carefully review the current IRS 409A correction program to see if there are any fixes they can make. The deadline to comply with Section 409A was Dec. 31, 2008. While there's a limited correction program in place for operational non-compliance, there's currently no similar correction program for failures to comply with the plan document requirements. Finally, companies should conduct a mini-audit to check for compliance.

On a brighter note, Melbinger says there's talk of a correction program for documents. Mention that a program is in the works came from IRS Senior Counsel Stephen Tackney in remarks before the Tax Section of the American Bar Association.

"That may provide one last chance for those who thought they already used all of their chances to correct errors," Melbinger says.

Below is some of the information and documents the IRS is requesting.

1. Identify each of the plans/arrangements and the corresponding participants that provided the participant/service provider a legally binding right in one year to a payment of compensation in a subsequent year that is not a non-qualified deferred compensation plan subject to § 409A.

For all such identified plan(s)/arrangement(s), provide the basis for your position that such arrangement is not a non-qualified deferred compensation plan subject to § 409A.

Where such basis is that the plan/arrangement provides a short-term deferral, describe the terms of the arrangement including the terms of any relevant substantial risk of forfeiture.

2. Did the company maintain any plan/arrangement under which a participant elected to defer the receipt of compensation that would otherwise have been paid during 2006 or a later year, as to which there was no previous deferral election? If yes, identify the terms under which all such elections were made, including any relevant deadline for making such an election.

3. Did the company defer a payment beyond the originally scheduled payment date, for example, by amending the arrangement providing for the payment? If yes, identify the terms of each such subsequent deferral, including the original payment date and the rescheduled payment date.Were any such subsequent deferrals made with respect to amounts that otherwise would have been payable in 2006?

4. Did the company permit any participant to elect to receive a payment under a non-qualified deferred compensation arrangement before the originally scheduled payment date? If yes, identify the terms under which all such elections were made, including any relevant deadline for making such an election. Did any of such election cause amounts to be paid during 2006 that would not otherwise have been payable in 2006?

5. Did the company make any payments of non-qualified deferred compensation during 2006 that were scheduled to be paid in a subsequent year? If yes, identify the terms of the payment, including the original scheduled payment date and the actual payment date.

6. Did the company identify the participant(s) who were specified employees for all or any part of 2006? If yes, identify all such specified employees and the period during which the service provider was a specified employee.