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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
Improving the Employee Plans Compliance Resolution System: A Roadmap For Greater Compliancethe agent is required to consider a number of subjective factors. 79 The InternalRevenue Manual (“Manual”) contains the sole source of published guidance regardinghow specialists are to administer Audit CAP. 80 As a general matter of procedure, thespecialist is required to fully develop the facts and legal aspects of the case. 81 If a PlanFailure is discovered, the specialist is required to consult with his or her Group Managerprior to advising the Plan Sponsor that disqualification of the plan is being proposed.The Plan Sponsor is then offered the opportunity to enter into negotiations for a closingagreement under Audit CAP, including a proposal of the sanction amount to be paid. 82With respect to the determination of the sanction amount, the Manual repeats thestandard set forth in Rev. Proc. 2006-27 that a sanction not be excessive and bear areasonable relationship to the nature, extent and severity of the Plan Failure. TheManual reminds the specialist to take into account the extent to which correctionoccurred before audit; 83 however, the Manual is silent as to how a specialist is todetermine (i) a dollar amount for an initial demand, (ii) a dollar amount for a finalsettlement offer, and (iii) how the sanction should relate to a specific set ofcircumstances. Rather, the Manual requires that the specialist discuss any case(including sanction amounts) where the specialist is considering entering into a closingagreement with the Audit CAP Coordinator before completing negotiations with the PlanSponsor. 84 The Audit CAP Coordinator is responsible for maintaining consistency inAudit CAP closing agreement cases, providing correction guidance to specialists andensuring simultaneous processing of the closing agreement package and the remittanceto the collection remittance processing function. 85 The ACT understands that there are,at the time of this report, five CAP coordinators covering each of the five EPExamination Areas. The Central Coordination <strong>Committee</strong> (an informal committee to, inpart, enforce consistency) is available as a resource for the Audit CAP Coordinator.In cases involving 500 or more Participants, or involving a potential maximum paymentfigure of $1 million or more, the Audit CAP Coordinator is encouraged, thoughseemingly not required, to consult with the Manager, Voluntary Compliance,79 The steps taken by the Plan’s Sponsor to ensure that the plan had no failures include identifying failures that may have occurred;the extent to which correction had progressed before the examination was initiated, including full corrections; the number and typeof employees affected by the failure; the number of non-highly-compensated employees who would be adversely affected if theplan were not treated as qualified or as satisfying the requirements of section 403(b), section 408(k) or section 408(p); whetherthe failure is the failure to satisfy the requirements of section 401(a)(4), section 401(a)(26) or section 410(b), either directly orthrough section 403(b)(12); the period over which the failures occurred (for example, the time that has elapsed since the end ofthe applicable remedial amendment period under section 401(b) for a Plan Document failure); the reason for the failures (forexample, data errors such as errors in transcription of data, the transposition of numbers, or minor arithmetic errors). Factorsrelating only to qualified plans also include: whether the plan is the subject of a Favorable Letter; whether the plan has bothOperational and other failures; the extent to which the plan has accepted Transferred Assets, and the extent to which the failuresrelate to Transferred Assets and occurred before the transfer; whether the failures were discovered during the determination letterprocess. Additional factors relating only to 403(b) plans include whether the plan has a combination of Operational, Demographicor Employer Eligibility Failures; the extent to which the failures relate to Excess Amounts; and whether the failure is solely anEmployer Eligibility Failure.80 Manual § 7.2.2 et seq.81 Id. at § 7.2.2.6.2. 82 Id. at § 7.2.2.6.1. 83 Id. at § 7.2.2.6.4. Interestingly, the other factors set forth in Rev. Proc. 2006-27 §14.02 are not repeated. 84 Id. at § 7.2.2.6.1. 85 Id. at § 7.2.2.6.6. ADVISORY COMMITTEE ON TAX EXEMPT AND GOVERNMENT ENTITIES (ACT) June 11, 2008 37
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The Streamlined Closing Agreement F
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ADVISORY COMMITTEE ONTAX EXEMPT AND
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PROTECTING PLAN BENEFITS:IMPROVING
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Tax Treatment Of Cellular Telephone
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IRC, 2007-CODE-VOL, SEC. 280F. LIMI
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PENIRC S 274 Page 1 of 12IIRC, 2007
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Employee Cell Phones Page 1 of 1Emp
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15. Special Rules for Various Types
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Withholding RequirementsACCOUNTING
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