By Kara M. Brunk, Esq.
Poyner Spruill LLP, Raleigh, NC
The IRS Employee Plans Compliance Unit (EPCU) recently announced two new projects and updated two others. In each case EPCU is using compliance checks as a tool to increase IRS enforcement presence and ensure compliance.
If you receive a compliance check, you should respond! Ignoring a compliance check may lead to a full-scope audit. While plan errors discovered during a compliance check can be corrected through the Voluntary Correction Program (VCP), this less expensive option is not available once the plan is under IRS examination. You should consult with legal counsel when responding to a compliance check to determine if corrections are needed.
The two new and two updated projects are:
Form 5500 Non-Filer Last month EPCU announced a new Form 5500 non-filer project focused on plan years ending in 2011. Plan sponsors who have not yet filed Form 5500 for plan years ending in 2011 may soon receive a compliance check in the mail. The IRS or DOL, or both, may assess penalties for failure to file a timely return without reasonable cause. The IRS penalty is $25 per day with a maximum penalty of $15,000 and the DOL penalty is up to $1,100 per day with no maximum. If you have not yet filed Form 5500 for previous plan years, you should do so as soon as possible and consider whether the DOL's delinquent filer voluntary correction program is available to mitigate penalties.
401(k) Plans Reporting 4971(a) Tax This new project is targeting 401(k) plan sponsors who filed a Form 5330, Return of Excise Taxes Related to Employee Benefit Plans, indicating excise tax was owed under §4971(a). Section 4971(a) excise tax is not applicable to 401(k) plans. For that reason, EPCU is trying to determine through compliance checks the type and amount of excise tax that should have been reported on the Form 5330 and whether there is any discrepancy between the amount owed and the amount originally reported.
Terminated Plans with Outstanding Participant Loans EPCU updated information regarding its compliance project on terminated plans with outstanding participant loans. Under this project, compliance checks were sent to plan sponsors of terminated plans with investments in participant loans, as indicated on the final Form 5500. EPCU will use the questionnaire answers and corresponding Forms 1099-R to determine whether the participants' outstanding loan balances at the time all plan assets were distributed were correctly reported on the participants' Forms 1099-R. A plan sponsor who failed to properly report outstanding loan balances as taxable distributions will be asked to file amended Forms 1099-R and to tell affected payees to file amended income tax returns.
Non-Governmental 457(b) Plans Updates were also made to the non-governmental 457(b) plans project. For this project, tax-exempt entities that filed Forms W-2 for 2011 showing contributions to a non-governmental 457(b) plan ("Top Hat" plan) and also filed Forms 990 are on EPCU's radar. This project is focused on verifying that the deferrals reported on the W-2 represent a 457(b) plan and that eligible participants are limited to select highly compensated employees, managers, directors or officers. EPCU will use responses to the compliance check questionnaire to determine if the sponsor is eligible to have a 457(b) plan, whether the plan contains impermissible features, and whether unforeseeable emergency distributions have been made. If EPCU finds operational errors or that the sponsor is not an eligible employer, the IRS may recommend correction through the Voluntary Correction Program (VCP) or subject the plan to examination.
For more information, in the Tax Management Portfolios, see Kushner, 361 T.M., Reporting and Disclosure Under ERISA, 370 T.M., Qualified Plans — Taxation of Distributions, Cook and Holland, 371 T.M., Employee Plans — Deductions, Contributions and Funding, Schwartz, 373 T.M., Employee Benefits for Tax-Exempt Organizations, Brisendine, Drigotas and Pevarnik. 385 T.M., Deferred Compensation Arrangements, and in Tax Practice Series, see ¶5550, Tax Aspects of Qualified Retirement Plans, ¶5570, Reporting and Disclosure Requirements for Benefit Plans, ¶5710, Deferred Compensation Tax Concepts and Structures.
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