409A Valuation for CPAs: Corrections, Reporting, and Independence
Author: Redwood Valuation Content Team
Published: September 25, 2026
Most 409A content is written for founders. This CPA 409A valuation guide is for the advisor who gets the call after an option grant goes sideways or is asked whether they can prepare the valuation in the first place. The focus is not valuation mechanics. The article first explains who bears the tax when §409A fails and why grant-date valuation matters for a stock option. It then turns to who can prepare the valuation under the applicable professional and independence rules before working through failure type, available correction routes, filing, and income reporting.
For valuation methods, safe harbors, and report standards more broadly, start with our complete 409A valuation guide. This article keeps the valuation discussion to the issues that affect the CPA's role: the relevant safe-harbor framework, qualification and independence, and the boundary between a 409A valuation and ASC 718.
Who Actually Pays When a §409A Failure Occurs
When a plan failure causes an amount to be includible under §409A, the affected service provider bears the income inclusion and additional §409A taxes under §409A(a)(1). The service recipient may have separate withholding and reporting duties, but it doesn't pay the additional 20% tax or premium interest tax for the service provider.
For the service provider, a §409A failure can trigger three tax consequences:
Income inclusion of compensation deferred under the noncompliant plan for the current and preceding taxable years, to the extent it is not subject to a substantial risk of forfeiture and was not previously included in income
An additional 20% income tax on the amount included. That rate is federal; California conforms with its own additional tax, reduced to 5% for taxable years beginning on or after January 1, 2013 (Cal. Rev. & Tax. Code §17508.2)
A premium interest tax based on the underpayments that would have occurred, using the federal underpayment rate plus one percentage point
For an employee, Notice 2008-115 requires the employer to withhold federal income tax on amounts includible under §409A and report the includible amount on Form W-2, but not to withhold the additional §409A taxes. For a nonemployee service provider, the payer reports amounts includible under §409A on Form 1099-MISC as applicable. Notice 2008-115 also notes that nonemployees may need to make estimated tax payments.
For a nonstatutory stock option, grant-date valuation matters because the stock-right exclusion from §409A generally requires the exercise price to be at least the fair market value of the underlying stock on the grant date, along with the exclusion's other conditions. If the exercise price is set below grant-date fair market value, the option can fall outside that exclusion. The correction discussion below focuses on the Notice 2008-113 routes for an otherwise-excluded stock right whose exercise price was set too low.
When the CPA Can Prepare the Valuation
Clients sometimes ask whether you can prepare the 409A valuation. Under the illiquid start-up presumption, the answer can be yes if you're qualified by significant knowledge, experience, education, or training and the company and stock satisfy the method's other conditions. The independent-appraisal presumption is different: it requires an independent appraisal meeting §401(a)(28)(C).
The CPA qualification question sits within a broader safe-harbor framework. Under Treas. Reg. §1.409A-1(b)(5)(iv)(B)(2), three valuation methods are presumed reasonable:
Independent appraisal. An independent appraisal that meets the §401(a)(28)(C) requirements, dated no more than 12 months before the relevant transaction.
Formula price. A formula that would qualify under §1.83-5 as a fair-market-value formula for a nonlapse restriction and is used consistently for the transfers specified in the regulation.
Illiquid start-up. A qualifying written valuation of illiquid start-up stock that meets the conditions covered in the next section.
The three methods are safe harbors, not the only path. Outside them, a valuation is judged under the regulation's facts-and-circumstances reasonableness standard. When a presumption applies, the IRS can rebut it only by showing that the method or its application was grossly unreasonable.
Under the illiquid start-up presumption, the valuation must be "made reasonably and in good faith and evidenced by a written report." The person performing it must have significant knowledge, experience, education, or training in performing similar valuations. The regulation says "significant experience" generally means at least five years of relevant experience in business valuation or appraisal, financial accounting, investment banking, private equity, secured lending, or other comparable experience in the service recipient's line of business or industry. The five-year benchmark is a guideline for what counts as significant experience, not a bright-line eligibility rule.
Accredited in Business Valuation (ABV), Certified Valuation Analyst (CVA), and Accredited Senior Appraiser (ASA) are professional valuation designations, but the regulation doesn't require any of them for the illiquid start-up method. Instead, the method is based on whether the corporation reasonably determines that the person is qualified due to significant knowledge, experience, education, or training.
Meeting the §409A tax-rule qualification test doesn't by itself resolve your professional-practice obligations. For AICPA members, VS Section 100 (SSVS) generally applies when an engagement estimates the value of a business, business interest, security, or intangible asset and culminates in a conclusion of value or calculated value, subject to the standard's exceptions. You should also consider any applicable state-board requirements.
To use the illiquid start-up presumption, both the company and the stock must satisfy these conditions:
Business-age condition: The corporation and any predecessor are below the 10-year threshold for conducting a material trade or business
Market-status condition: No class of the corporation's equity securities trades on an established securities market
Transaction-timing condition: Neither the service recipient nor the service provider reasonably anticipates a change in control within 90 days or a public offering of securities within 180 days after the valuation is applied
Stock-rights condition: The stock is free of any put, call, or other right or obligation to purchase it, except for a right of first refusal triggered by an offer from an unrelated third party or a lapse restriction
Those conditions are restrictive, but a preferred-stock financing is not itself one of the regulation's disqualifying conditions. A young private company can remain eligible after a financing if the corporation and the stock still satisfy the requirements above and the valuation is made reasonably and in good faith by a qualified person. The financing may still make the valuation more complex when common and preferred stock have different economic rights. Our article on the 409A option pricing model explains one approach to that allocation problem.
Independence When You're Also Providing Attest Services
If you're an AICPA member performing a valuation for an attest client, the relevant AICPA independence rule is ET §1.295.110, the appraisal, valuation, and actuarial services interpretation. Other independence requirements may also apply to the engagement and can be more restrictive, including SEC and PCAOB requirements for public-company audits.
For AICPA members, the key provisions are:
.02 says independence is impaired if the valuation involves a significant degree of subjectivity and the results, individually or combined with other appraisal, valuation, or actuarial services, are material to the attest client's financial statements.
.03 requires permitted valuation services to satisfy the general requirements for nonattest services, including that the attest client determine or approve significant assumptions and matters of judgment, be able to make an informed judgment about the results, and accept responsibility for them.
.06 says threats would be at an acceptable level for appraisal, valuation, or actuarial services performed solely for nonfinancial-statement purposes, with tax planning or tax compliance among the examples.
The AICPA analysis changes when the same 409A valuation also supports financial reporting under ASC 718. In that situation, .06 no longer resolves the independence analysis because the valuation is not being used solely for a nonfinancial-statement purpose. The .02 test then applies: independence is impaired if the valuation involves a significant degree of subjectivity and the results are material to the attest client's financial statements. Whether both conditions are met is fact-specific. Before accepting the valuation engagement, apply your firm's independence process and any other independence rules that govern it.
A 409A Valuation Is Not the ASC 718 Award Valuation
A 409A valuation can be relevant to financial reporting, but it does not by itself determine the ASC 718 fair value of a share-based payment award.
Section 409A uses fair market value of the underlying stock to determine whether a stock option can qualify for the stock-right exclusion. ASC 718, by contrast, measures the grant-date fair value of the share-based payment award. For a nonpublic entity's equity-classified award, ASC 718 provides a practical expedient for the current-price input. Under that expedient, one example of a reasonable valuation for the input is a valuation performed under the Treasury §409A valuation rules, with the characteristics specified in ASC 718.
A qualifying 409A valuation can therefore be an input to the ASC 718 measurement without being the award valuation itself. For an option, ASC 718 still requires the other applicable inputs, including expected volatility, expected term, the risk-free interest rate, and expected dividends.
Identify the Failure Type Before Choosing a Correction Path
Before choosing a correction path, determine whether the problem is in the plan document, in how the plan was operated, or both.
Notice 2010-6, as modified by Notice 2010-80, "provides methods for taxpayers to voluntarily correct many types of failures to comply with the document requirements." It is the document-correction program. A related operational failure may require separate correction under the operational-failure procedures in Notice 2008-113.
Correcting a Discounted Stock Right Under Notice 2008-113
Notice 2008-113 covers several types of operational failures. This section focuses on the valuation-related failure addressed in §§IV.D and V.E: an otherwise-excluded stock right whose exercise price was erroneously set below grant-date fair market value. When the applicable requirements are met, those provisions can provide relief from what §I calls "the full application of the income inclusion and the additional taxes under § 409A."
For an otherwise-excluded stock right whose exercise price was erroneously set below the stock's fair market value on the grant date, §IV.D.2 permits the exercise price to be reset to no less than that grant-date fair market value. The reset must be completed by the last day of the service provider's taxable year in which the right was granted and before exercise of the portion for which relief is sought. A prior partial exercise doesn't necessarily eliminate relief for the unexercised remainder. Notice 2008-113's example allows the remaining portion to qualify if it is timely reset, while the already-exercised portion is not eligible. If §IV.D and the notice's other applicable conditions are met, the corrected portion is treated from the grant date as not providing for a deferral of compensation for §409A purposes.
A non-insider can have more time. Under §V.E, the same type of exercise-price correction may be completed through the last day of the service provider's taxable year immediately following the year of grant, but only if the service provider is not an insider during either the failure year or the immediately following taxable year and the other §V requirements are met.
| Situation | Correction window | Deadline | Effect |
|---|---|---|---|
| Otherwise-excluded discounted stock right, any service provider (§IV.D.2) | Same taxable year as grant | Last day of service provider's taxable year of grant, before exercise of the portion for which relief is sought | Qualifying corrected portion treated from grant as not providing a deferral |
| Otherwise-excluded discounted stock right, qualifying non-insider (§V.E) | Following taxable year | Last day of service provider's taxable year following the year of grant, before exercise of the portion for which relief is sought | Same as §IV.D.2 |
The examination rule applies to the following-year §V.E route, not same-year §IV.D relief. Under §III.C, examination of the service provider's federal income tax return for the failure year blocks relief under §§V-VIII, including §V.E. For an individual service provider, the notice treats an examination of the individual's federal income tax return for that year, such as Form 1040, as an examination with respect to the plan.
Relief depends on more than timing. Sections III and IX impose additional requirements on relief under §§IV-VIII. Among other things, the operational failure must be inadvertent and unintentional, the service recipient must take commercially reasonable steps to avoid a recurrence, and the applicable §IX reporting requirements must be satisfied. The specific correction section can impose further limits, including the non-insider and examination rules that apply to §V relief. Meeting the exercise-price reset deadline alone therefore does not establish that relief is available.
What Gets Filed for Notice 2008-113 Relief
The filing path depends on whether the correction is a same-year §IV correction or relief under §§V-VIII. Notice 2010-80 modified §IX.A for same-year §IV corrections, while §IX.B continues to govern the later-year relief sections. The required statement and return therefore depend on the correction section being used.
Same-year §IV correction. The service recipient attaches the statement titled "§ 409A Relief under IV of Notice 2008-113" to its timely-filed (including extensions) original federal income tax return for the taxable year in which the failure occurred. Section IX.A, as modified by Notice 2010-80, lists the required contents. No separate service-provider statement is required under the modified §IX.A. If an examination of the service recipient's federal return begins for a year covered by the relief, the service recipient must make reasonable efforts to notify the examining agent.
§V relief. The service recipient attaches the statement titled "§ 409A Relief under § V of Notice 2008-113" to its timely-filed (including extensions) original federal income tax return for the taxable year in which the failure is discovered. It must also furnish the required statement to the service provider by the applicable Form W-2 or Form 1099 furnishing date for that calendar year, or by the following January 31 if no information return is required. The service provider then attaches the information required by §IX.B.3 to the service provider's timely-filed original federal return for the discovery year. Each taxpayer relying on §§V-VIII relief must make reasonable efforts to notify the examining agent when an examination begins for a covered year.
Keep the required statements with the correction file so that the next preparer can see what relief was claimed and what was filed.
For examination-stage issues, see our 409A audit defense guide.
Reporting 409A Income
Once an amount is includible under §409A, income reporting is separate from the correction paperwork. Report the income in the correct form and box; the service provider handles the additional §409A taxes on the service provider's own return.
For employees, an amount includible under §409A is reported in Form W-2, Box 1, and in Box 12 using Code Z. The 2026 Form W-2 instructions describe Code Z as "Income under a nonqualified deferred compensation plan that fails to satisfy section 409A." Code Z reports the includible amount; it doesn't report the additional §409A taxes, which are borne by the employee and reported on the employee's own return.
For nonemployees, amounts includible under §409A that are reportable on Form 1099-MISC go in Box 15, Nonqualified Deferred Compensation, under the current 2026 instructions. Box assignments and reporting thresholds can change, so check the instructions for the year you're filing before preparing returns.
Talk to a Valuation Peer
When a client's 409A question turns into a valuation question, it helps to have an appraiser you can call directly. Redwood can assist with option-grant valuations, corrections that hinge on a supportable grant-date value, and reports that document the assumptions an auditor or examiner will review. Contact our team to talk through a client situation.
Frequently Asked Questions
Does the employer withhold the 20% additional 409A tax?
No. For employees, the employer withholds regular federal income tax on amounts includible under §409A, but Notice 2008-115 says the withholding is not increased for the additional §409A taxes. The 20% additional tax and premium interest tax are borne by the employee and reported on the employee's own return.
Does a CPA need a valuation credential to prepare a 409A valuation?
For the illiquid start-up presumption, the regulation doesn't require ABV, CVA, ASA, or another named valuation designation. Instead, it requires a written valuation by someone the corporation reasonably determines is qualified based on significant knowledge, experience, education, or training. The independent-appraisal presumption has a different standard: it requires an independent appraisal meeting §401(a)(28)(C). A CPA who performs the valuation must also consider any professional standards that apply to the engagement, including VS Section 100 for AICPA members where applicable and relevant state-board requirements.
How long do you have to fix a discounted stock option under Notice 2008-113?
Under Notice 2008-113 §IV.D.2, an otherwise-excluded stock right with an exercise price erroneously set below grant-date fair market value may be corrected for the portion that has not yet been exercised. The correction must be completed by the last day of the service provider's taxable year of grant. A prior partial exercise doesn't necessarily eliminate relief for the unexercised remainder, although the already-exercised portion doesn't qualify. Under §V.E, a qualifying non-insider may make the same type of correction through the last day of the immediately following taxable year. Section III.C blocks the §V relief if the service provider's federal income tax return for the failure year is under examination, but it doesn't block same-year §IV.D relief.
What statement gets attached to the return for a Notice 2008-113 correction?
It depends on the correction section. For a same-year §IV correction, §IX.A as modified by Notice 2010-80 requires the service recipient to file the statement titled "§ 409A Relief under IV of Notice 2008-113" with its timely-filed original return for the failure year. No separate service-provider information statement is required. For §V relief, §IX.B requires the service recipient to file its statement for the discovery year. It must also furnish the required statement to the service provider by the applicable Form W-2 or Form 1099 furnishing date, or by the following January 31 if no information return is required. The service provider must then attach the required §IX.B information to the service provider's timely-filed original return for that year.
Can Notice 2008-113 correct a 409A plan document failure?
No. Notice 2008-113 addresses operational failures, meaning problems in how a plan was run. Failures in the plan document itself go to Notice 2010-6, which "provides methods for taxpayers to voluntarily correct many types of failures to comply with the document requirements." It's a separate program with its own conditions. Some fact patterns involve both kinds of failure, so determine which type is present before choosing a correction path.
Where does 409A income go on Form W-2?
For employees, an amount includible under §409A goes in Form W-2, Box 1, and Box 12 using Code Z. The 2026 Form W-2 instructions describe Code Z as "Income under a nonqualified deferred compensation plan that fails to satisfy section 409A." The additional §409A taxes aren't reported in Code Z; the employee reports them on the employee's own return. For nonemployees, amounts includible under §409A that are reportable on Form 1099-MISC go in Box 15 under the current 2026 instructions.
Can a CPA providing attest services also prepare a 409A valuation?
It depends on the engagement and how the valuation will be used. Under AICPA ET §1.295.110, a valuation performed solely for tax planning or tax compliance can fall within .06. However, if the same valuation is also used as a current-price input for ASC 718, that solely nonfinancial-statement treatment no longer resolves the analysis. Under .02, independence is impaired if the valuation involves significant subjectivity and the results are material to the attest client's financial statements. Other applicable independence rules may be more restrictive, so apply the rules governing the engagement before accepting it.
Is a 409A valuation enough for ASC 718?
Not by itself. Section 409A uses fair market value of the underlying stock for the stock-right exclusion, while ASC 718 measures the grant-date fair value of the share-based payment award. For a nonpublic entity's equity-classified award, a valuation performed under the Treasury §409A valuation rules, with the characteristics specified in ASC 718, can support the current-price input under ASC 718's practical expedient. An option still requires the other applicable valuation inputs, so the 409A valuation can feed the ASC 718 measurement without being the award valuation itself.