Tax code Section 409A audits of selected taxpayers are underway. While the initial scope of the audits is limited, this is likely just the first step toward a more expansive project.

Section 409A regulates the tax treatment of nonqualified deferred compensation plans. The IRS audit project will focus on three issues: (1) initial deferral elections; (2) subsequent deferral elections; and (3) payouts under Section 409A, including the six-month delay for specified employees.

The IRS will select no more than 50 employers for the audits, which will be limited to the top 10 highly compensated individuals, according to Thomas D. Scholz, IRS senior technician reviewer, Office of Division Counsel/Associate Chief Counsel, Tax Exempt and Government Entities. Scholz spoke unofficially May 9 at a session of the American Bar Association Section of Taxation meeting, reports Bloomberg BNA.

More audits likely: Of course, most companies will avoid the 409A audits—for now. “If past history holds true, this program is just a first step in a process that will allow the IRS to hone its audit techniques and areas of inquiry with respect to 409A issues before the program is expanded to more employers,” according to executive pay experts Towers Watson. It advises plan sponsors to periodically conduct self-audits to make sure their plans are in compliance.

Extra: Valuations related to IRC 409A can be tricky. BVR’s Guide to Valuations for IRC 409A Compliance gives a good foundation of knowledge for valuation experts for the most common 409A valuations.