IRS Continues Attack on Accelerated 401(k) Plan Deductions

Abstract

For over 10 years, the IRS has been denying deductions for contributions to 401(k) plans, or to a defined contribution plan as matching contributions under Code Section 401(m), where the contributions are attributable to compensation earned after the end of the tax year for which the deduction is claimed. The most recent salvo fired by the IRS in this war is the issuance in October 2004 of "Appeals Settlement Guidelines ("ASG"), Deduction of Contributions to I.R.C. 401(k) Plan or to a Defined Contribution Plan as Matching Contribution Earned After the End of the Tax Year Under IRC 404(a)(6)." The ASG are essential reading for anyone interested in this topic. This article discusses the history of this controversy, and the various steps taken by the IRS to combat the use of this technique.

After this article was written, the Treasury Department issued final regulations amending Circular 230 in December 2004. The final regulations are similar to the proposed regulations, though somewhat less stringent. The final regulations will be covered in a future issue of the Journal.

Keywords: Internal Revenue Service (IRS), 401(k), Appeals Settlement Guidelines (ASG)