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March 15 — “Interesting,” “unusual” and “unprecedented” are just three of the words practitioners used to describe a recent lawsuit that was allowed to move forward against the Internal Revenue Service, alleging that the agency mismanaged its Voluntary Correction Program.
The lawsuit, Info. Sys. & Networks Corp. v. IRS, may be the first of its kind, but probably isn't a signal that an avalanche of cases against the IRS's program is on its way. Overall, the agency has been amenable to working with retirement plans coming in to VCP, David Mustone, a partner at Hunton & Williams LLP in McLean, Va., told Bloomberg BNA on March 14.
The lawsuit accuses the IRS of refusing to consider a retirement plan's attempt to maintain tax-qualified status by correcting plan errors through the VCP. The program allows retirement plans to identify and correct errors in plan design and operation that would jeopardize their tax-qualified status. A federal district court declined the IRS's motion to dismiss the lawsuit March 2 .
Daniel L. Morgan, a partner with Blank Rome LLP in Washington, agreed that the IRS typically is willing to work with plans coming through the VCP, telling Bloomberg BNA on March 14 that it isn't common for the agency to throw plans out.
“It’s a very odd set of facts and it’s unusual to see these kinds of issues in this setting,” but it clearly made the IRS uncomfortable, Morgan said.
One interesting facet of the complaint is that it accuses the agency of refusing to consider issues that are “fairly routine,” Mustone said.
According to the complaint, Information Systems and Networks Corp. wanted to correct several issues, including miscalculating years of service; using the wrong compensation data; using incorrect birth, hire and termination dates; and maintaining a “suspense” account, which holds unallocated funds.
While the issues the plan sought to correct may be considered routine, the IRS kicked back the VCP application, claiming it was a fiduciary issue that should go to the Department of Labor.
“I suspect there’s a lot more to the story. In terms of what’s in the complaint, the issues that they mention are typically addressed and corrected through VCP,” Mustone said.
Mustone said he's never had a problem with VCP submissions and he hasn't heard anecdotally of any issues others have had. “Maybe once in my career,” he said.
David Cowart, a Dallas-based partner with Dentons, told Bloomberg BNA on March 15 that “this case is unprecedented.”
Revenue Procedure 2013-12, which covers all of the Employee Plans Compliance Resolution System correction programs, including the VCP, gives the IRS the right to reject VCP applications for several reasons, Cowart said.
In addition, the IRS had the application for more than a year, which is a “generous allotment of time,” Cowart said. Because of the time that elapsed, it is likely that the IRS “gave the application every opportunity,” he said.
“If you’re willing to follow the rules and if you’re willing to submit the information they ask for and if you’re willing to work with them on a timely basis, then I’ve found the VC branch to generally be accommodating,” Cowart said.
If the lawsuit were to go to trial and the IRS lost, the result could put a squeeze on the agency's program, Morgan said.
“If you can contest, if you went through the program and you didn’t like the result you were getting and therefore you refused to give the correction the IRS is requesting, it would open up the possibly of litigation,” he said.
Still, Morgan said he doesn't imagine the courts will evaluate a discretionary correction program.
“It seems very unlikely that this is going to go against the Service. The court might make a significant effort to not undo what is discretionary,” he said.
Whether more plans will come forward now claiming issues with the correction program remains to be seen, but there's not a lot out there to suggest that they will.
“It’s hard to say whether this is the tip of the iceberg or not. There’s not a lot of scuttlebutt out there that this is a common problem,” Mustone said.
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