Advisory Committee on Tax Exempt and Government Entities (ACT ...

Improving the Employee Plans Compliance Resolution System: A Roadmap For Greater Compliancesmaller, less sophisticated employers who may need a program for voluntary correctionof delinquent IRS Forms 5500.The ACT recommends that the VCP be broadened to include relief from Code penaltiesfor delinquent IRS Form 5500-EZ filers and for delinquent IRS Form 5500 filers for planswithout employees. Penalty relief and sanction payment in accordance with a statedchart could be added as a separate section of the VCP. Broadening VCP in this way isconsistent with recent expansions of the program to similar small employer or uniqueemployer situations, e.g., corrections allowed regarding SIMPLE IRAs, SEPs andorphan plans.C. Recommendations to Improve Audit CAP1. Audit CAP as it Currently ExistsPlan Sponsors of plans which are found on audit to have “insignificant” OperationalFailures may “self–correct” the Plan Failure. 75 Such action may be taken without theimposition of a sanction.Plan Sponsors of plans under audit that are found to have one or more QualificationFailures (e.g., Plan Document or Operational Failure) that are other than “insignificant”may choose to enter the Audit CAP Program. Under Audit CAP, in lieu ofdisqualification, the Plan Sponsor corrects the Plan Failure as required by the specialist(a front line agent), pays a monetary sanction that is a negotiated percentage of theMaximum Payment Amount, 76 satisfies certain additional requirements that may berequired by the Service and enters into a closing agreement. 77 For qualified plans, theMaximum Payment Amount is a monetary amount that is approximately equal to the taxthe Service could collect upon plan disqualification.The sanction must not be excessive and must bear a reasonable relationship to thenature, extent and severity of the Plan Failures. 78 In determining the sanction amount,75 Rev. Proc. 2006–27, § 8.01. No precise definition of “insignificant” is given in the Rev. Proc. Rather, a list of seven factors to beconsidered is provided. Since there is no public disclosure of the specifics of Audit CAP cases, it is unclear how often selfcorrectionduring audit is permitted.76 The Maximum Payment Amount is the sum for the open taxable years of the (a) tax on the trust (Form 1041) (and any interestand penalties applicable to the trust return); (b) additional income tax resulting from the loss of employer deductions for plancontributions (and any interest and penalties applicable to the Plan Sponsor’s return); (c) additional income tax resulting fromincome inclusion for Participants in the plan (Form 1040), including the tax on plan distributions that have been rolled over toother qualified trusts (as defined in section 402(c)(8)(A)) or eligible retirement plans (as defined in section 402(c)(8)(B)) (and anyinterest and penalties applicable to the Participants’ returns); and (d) any other tax that results from a Qualification Failure thatwould apply but for the correction under Audit CAP. For 403(b) Plans, the Maximum Payment Amount is the monetary amountthat is approximately equal to the tax the Service could collect as a result of the 403(b) Failure, and is the sum for the opentaxable years of the (a) additional income tax resulting from income inclusion for employees or other Participants (Form 1040),including the tax on distributions that have been rolled over to other qualified trusts (as defined in section 402(c)(8)(A)) or eligibleretirement plans (as defined in section 402(c)(8)(B)) (and any interest and penalties applicable to the Participants’ returns); and(b) any other tax that results from a 403(b) Failure that would apply but for the correction under Audit CAP.77 With respect to non–amender violations discovered by the IRS during a determination letter application, a sanction is imposedaccording to a pre–established chart. Rev. Proc. 2006–27, § 14.04.78 Rev. Proc. 2006-27, § 14.01.ADVISORY COMMITTEE ON TAX EXEMPT AND GOVERNMENT ENTITIES (ACT) June 11, 2008 36