IRS Issues Final 409A Relief Procedures

Notice 2008-113 replaces Notice 2007-100 issued December 3, 2007 (see “Feds Unveil Potential 409A Compliance Relief” and “Correction Appended“), and provides procedures for taxpayers to follow for correcting “certain operational failures during the service provider’s taxable year in which the failure occurs.” The procedures also apply for certain service providers during the following taxable year.

According to the IRS notice, the new procedures include:

• Methods for correcting certain operational failures during the service provider’s taxable year in which the failure occurs and, for certain service providers also during the subsequent taxable year, to avoid income inclusion under § 409A(a).
• Relief limiting the amount includible in income under § 409A(a) for certain operational failures during a service provider’s taxable year that involve only limited amounts.
• Relief limiting the amount includible in income under § 409A(a) for certain operational failures regardless of whether the failure involves only limited amounts, but subject to further required actions to correct the failure.
• Special transition relief for certain operational failures occurring before January 1, 2008.

Being Eligible for Relief

In explaining the eligibility requirements, the IRS said a taxpayer is not eligible for certain relief measures unless all of the applicable requirements are met, as well as the requirements of the particular section providing the applicable relief and the notice and the reporting requirements.

In each instance, the taxpayer claiming the relief has the burden of demonstrating that the taxpayer was eligible for the relief and that the requirements of this notice have been met, the tax agency said.

The relief measures are not available unless, in addition to meeting the applicable requirements of the relevant section, the service recipient takes commercially reasonable steps to avoid a recurrence of the operational failure.

According to the new release, if the same or a substantially similar operational failure has occurred previously, the relief is not available for any taxable year of the service provider beginning after December 31, 2009, unless the service recipient or service provider demonstrates that the service recipient had established practices and procedures reasonably designed to ensure that such an operational failure would not recur and had taken commercially reasonable steps to avoid a recurrence of the operational failure, and that the operational failure occurred despite the service recipient’s diligent efforts.

The new revised relief procedures are available here.