Posts Tagged ‘Section 409A’

Thoughts on a more business-friendly tax law

Tuesday, November 27th, 2012 by Joe Kristan

I was asked yesterday how the tax law could be made more friendly to small business.  Here is how I answered the question (with some slight editing for clarity in the morning).  I would love readers to chime in via the comments, or for other bloggers to respond in their own posts.

There are a thousand things that could be done, but they fall into just a few categories:

1- Don’t try to micromanage business decisions through the tax law.
2- Remove big penalties for foot-fault violations.
3- Make it easy for non-compliers to come into compliance.
4- Don’t treat the business as a social service agency.
5- Make mistakes matter less through lower rates.
6- Whatever you do, make it simple.
If you have a tax law with fewer special favors to industries (green jobs and so on) you can lower the rates for everyone.  If somebody makes an honest mistake, they shouldn’t get clobbered, especially if they can identify and correct the mistake on their own.  And if rates are lower, there’s less incentive to cheat or make solely tax-motivated decisions.
For example:  Obamacare has a health-care credit for tax credit small (under 25 full-time equivalent) employers.  It is very complicated, requires careful compliance with non-discrimination rules, and phases out as you grow.  It violates rule 1 by micromanaging the compensation structure of a small business.  It violates rule 4 by making the business the provider of a welfare benefit.  It violates rule 6 by being almost incomprehensibly complex.
The deferred comp rules in the tax law (Section 409A) are a great example of bad law.  Enacted to keep Enron from doing what it had already done, it applies as well to every business, long after Enron is a memory.  If you violate a very complex set of deferred comp rules, the employee – and every employee in the plan – can be hit with an income tax and a 20% excise tax on his deferred comp balance — even though he might never receive it.  It violates every rule above, except (maybe) rule 4. 
A tax law that followed these would be much easier to obey and much more business-friendly.

The best way to fix it is to kill it

Monday, February 13th, 2012 by Joe Kristan

A North Carolina tax professor gets the Section 409A deferred compensation rules:

This [article] … describes the legislative calamity that is


409A: compliance or bust

Monday, September 20th, 2010 by Joe Kristan

Richard Meisner at 409A Dismay notes a law review article explaining why the 409A deferred comp rules — the worst tax enactment since I got into the business in 1984 — is such awful policy:

The author argues, however, that in Section 409A Congress nonetheless overreacted, creating a statute whose overbreadth and penalty structure imposed its own societal cost (in the form of compliance and transaction expenses) that possibly outweighs the cost of the tax abuse the section was designed to correct. More generally, he argues that “binary,” high-risk enforcement schemes, where the only two possible taxpayer states are full compliance and ruinous noncompliance, lead to inefficient results and are bad tax policy.

The only thing more puzzling than the enactment of 409A is the absence of any significant Congressional efforts to repeal it.


Offshore compliance amnesty: A 99.7% Failure?

Tuesday, March 23rd, 2010 by Joe Kristan

Last year’s big foreign account amnesty was an enormous bust, argues international tax lawyer Phil Hodgen:

. I take that position based on a simple fraction. Its numerator is the number of people who have done the voluntary compliance for undisclosed foreign accounts. The denominator is the number of people who should do it.

The nominator in the fraction is 14,700 [participants in the amnesty]…


Out with the old

Tuesday, January 20th, 2009 by Joe Kristan

The people have spoken. Execrable Section 409A is the worst single tax provision of the Bush 43 era:
The write-in vote was for bonus depreciation.
Today starts a whole new era of bad tax policy!


409A: the worst single tax provision of the Bush era

Thursday, January 8th, 2009 by Joe Kristan

William Drennan, a law prof at good old Southern Illinois University-Carbondale, is exactly right about the execrable Section 409A deferred compensation rules:

Albert Einstein said “the hardest thing in the world to understand is the income tax.” The new nonqualified deferred compensation rules are a testament to Einstein’s brilliance. The new rules will fail to achieve their statutory purpose, will create traps for the unwary, and should be repealed retroactively.

Indeed they should. It won’t happen, though, until somebody actually tries to enforce the section by imposing current tax, plus a 20% penalty, on income never received by employees as a result of a careless mistake made by an employer in administering the byzantine Section 409A rules. If the IRS ever gets serious about enforcing this mistake, it will make the efforts to get relief from the incentive stock option AMT rules look like a minor matter.
Meanwhile, small businesses, non-profits, and even school districts have to deal with this horribly-concieved response to the Enron and Worldcom scandals by shooting the remaining horses after one escaped the barn. That’ll teach Ken Lay a lesson.
Via the TaxProf.