A federal judge refused to dismiss a retirement plan sponsor’s  lawsuit accusing the Internal Revenue Service of failing to consider the plan’s Voluntary Correction Program submission.

Info. Sys. & Networks Corp. v. IRS, D.D.C., No. 1:14-cv-02019, minute order 3/2/6, appears to be the first lawsuit of its kind. Judge Richard J. Leon of the U.S. District Court for the District of Columbia denied the IRS’s motion to dismiss, but did not give a written opinion explaining his reasoning.

This lawsuit raises several questions.  

  • Will other plan sponsors follow suit and start suing the IRS to consider their submissions?

  • If too many lawsuits like this are filed against the IRS, will the agency decide it is no longer worth having a voluntary correction program?

  • Can this lawsuit be applied to other agencies, such as the DOL, to force them to address submissions in their voluntary compliance programs?

David N. Levine, a principal at Groom Law Group Chartered in Washington, told Bloomberg BNA that “as the employee plans component of the IRS retrenches and hands off responsibilities elsewhere, the question of what the IRS can do and is willing to do continues to evolve. However, under the VCP, regardless of whether or not all of us practitioners always agree with the IRS’s decisions, the IRS has significant discretion over how to approach corrections.”

David Mustone, a partner at Hunton & Williams LLP in McLean, Va., told Bloomberg BNA that he has never seen a challenge like this. “It is understood that EPCRS is intended to be a discretionary program. There is specific discretion not to do anything.” However, this complaint raises two issues that clearly are ones the IRS would normally consider under VCP--incorrect data for vesting and contribution purposes, and an unallocated suspense account, he said. Depending on the success of this lawsuit, Mustone raised the possibility of plaintiffs bringing litigation for a different issue, where the IRS refused to accept a particular form of correction that is different from the standard correction.

ISN brought the lawsuit under the Administrative Procedure Act, alleging that the IRS arbitrarily refused to meaningfully consider, and issue a ruling in connection with, the company’s VCP submission regarding the plan.

This complaint results from a long-running dispute with the Department of Labor over prior plan fiduciaries' alleged failure to make required plan contributions. An independent fiduciary was appointed by the U.S. District for the District of Maryland on a motion by the DOL.  

ISN alleged that after it filed for VCP review, the IRS agreed to review the errors made by the plan’s independent fiduciary if ISN hired a consultant to analyze the errors, and ISN supplied the analysis. However, the IRS later declined to consider the analysis or the VCP submission any further.

The complaint also alleged that with respect to other plan administration errors, the IRS refused to consider the VCP submission on the erroneous grounds that problems related to the plan’s independent fiduciary should be addressed to the DOL. ISN said the IRS “mistakenly believed that the independent fiduciary was appointed by (and was therefore answerable to) the DOL. DOL does not control or exercise oversight of the independent fiduciary.”

ISN is asking the court to find that the IRS abused its discretion in refusing to consider and rule on ISN’s VCP submission, issue any writs necessary to compel the IRS to respond to the submission, and any other appropriate relief.

See the related story, Pension Plan Advances Novel Challenge to IRS Program.

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