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Improving the Employee Plans Compliance Resolution System: A Roadmap For Greater Complianceexcessive and will bear a reasonable relationship to the nature, extent and severity ofthe Plan Failure, based on a set of vague factors susceptible to wide interpretation. 91Given the fact that the sanction is a “negotiated percentage of the Maximum PaymentAmount,” the starting point for the negotiation has the potential for being high and therange of appropriate sanction amounts has the potential for being enormous. For largeand small plans alike, the Maximum Payment Amount can reach into the millions ofdollars. Although specialists generally do not begin the negotiation process at theMaximum Payment Amount, nevertheless, the specialists can exercise a great deal ofdiscretion in formulating an initial demand and a final settlement offer. 92 Moreover, in allbut the largest cases, decisions are made by relatively low grade-level Serviceemployees. Some practitioners who cannot reach agreement with the specialist mayinformally contact TE/GE leadership in an attempt to resolve the case. The ACT viewsthis step as problematic both for the practitioner and the Service’s senior leadershipsince it could give rise to a claim of uneven treatment. Ultimately, most Plan Sponsorsaccept the Service’s final settlement offer.Second, Audit CAP is closed. Specifically, there is no public information as to thedisposition of cases. While the specialists, the Group Manager and the CAPCoordinator have access to data revealing the range of sanction amounts imposed incomparable cases, the Plan Sponsor has no such access. Thus, the Plan Sponsor is ata disadvantage in crafting a reasonable proposal and determining whether the Service’sdemands are appropriate.Third, a Plan Sponsor who cannot arrive at a settlement under Audit CAP has nomeaningful right of appeal. In the event a Plan Sponsor is unable to reach anagreement with the Service, the Service issues a letter disqualifying the plan. The letterincludes a reminder that the Plan Sponsor has 30 days to file an administrative appealwith the Service Appeals Office, an independent division under the authority of theOffice of Chief Counsel. At Appeals, substantive issues are reviewed, but decisions tosettle are generally based on an assessment of the hazards of litigation. 93 If the casecannot be resolved at Appeals, the Sponsor has the right to appeal to the Tax Court.Unfortunately, this appeal procedure is of little use to most Plan Sponsors. Because ofplan disqualification’s Draconian consequences to Plan Sponsors and Participants alike,and the fact that a disqualifying event usually has occurred, most Plan Sponsors areunwilling to risk an appeal and subsequent litigation even if the Plan Sponsor believesthe Service’s position is unwarranted. Thus, Plan Sponsors who have negotiated to thebest of their ability with the specialist often feel that they are forced to accept inequitablyhigh sanction amounts.91 Manual § 7.2.2.6.4. 92 The ACT considered recommending a more objective system as a replacement to the existing one modeled after the federal criminal sentencing guidelines, but rejected this approach as too restrictive. This view seemed to be shared by the EP leadershipbecause of the inherently complicated set of facts routinely presented in plan Failure cases.93 Oshinsky, “Employee Plans: Guidelines for the Resolution of Qualification Violations,” 20 Tax Management CompensationPlanning Journal 167, 175–176 (8/7/92); see also Wagner and Bianchi 375 T.M., EPCRS – Plan Correction and Disqualification atA–9.ADVISORY COMMITTEE ON TAX EXEMPT AND GOVERNMENT ENTITIES (ACT) June 11, 2008 40
Improving the Employee Plans Compliance Resolution System: A Roadmap For Greater Compliance3. Recommendationsa. Public Disclosure of Audit CAP InformationThe ACT believes that the administration of Audit CAP would be enhanced with thepublic release of information regarding the imposition of sanctions. Currently, PlanSponsors are left with speculation, rumor and limited ad hoc experience to serve as thebasis for negotiation. The ACT understands it may be unrealistic for the Service torelease detailed information regarding prior cases, such as redacted closingagreements, as this would likely violate the Service’s privacy policies. Therefore, theACT recommends the release of general information such as statistics regarding caseswhere the insignificant 94 exception to Audit CAP has been used, the size of sanctions asa percentage of Maximum Payment Amounts, and the dollar amount of sanctions inrelation to the size and type of plan audited. Because of resource limitations, the ACTunderstands that even this information may be difficult to compile and release. As analternative, the development and dissemination of stylized examples describing PlanFailures and typical sanction amounts would be helpful.b. Creation of a More Formalized Internal ReviewThe ACT also believes that a more formalized internal review of Audit CAP cases thatcannot be settled at the specialist level would be beneficial. Therefore, the ACTrecommends that if a Plan Sponsor disagrees with an agent’s final settlement offer, thePlan Sponsor be entitled to request a reconsideration of the case. If the request meetsa basic threshold for substance, the case could be reviewed by a two-person committeeconsisting of a senior individual appointed by the Director, EP who is not in the auditchain-of-command (e.g., Manager, EP Voluntary Compliance) and the Area Managerunder whose jurisdiction the audit case is processed. The review process could belimited to whether the recommended sanctions are reasonable.Moreover, the ACT does not recommend that fees be charged for a request forreconsideration but, as part of the process, the Plan Sponsor may be encouraged tosubmit a brief statement explaining why the Plan Sponsor believes that the decision ofthe specialist is incorrect. Additionally, the Service may wish to limit Plan Sponsorrepresentation before the committee as Service resources may be unavailable to createa formalized review panel. In the event the committee cannot resolve an issue, theDirectors of EP Examinations and EP Rulings and Agreements could become involved.Any such review procedure should be formally incorporated into EPCRS to provideadequate notice to Plan Sponsors.94 Rev. Proc. 2006-27, § 8.01.ADVISORY COMMITTEE ON TAX EXEMPT AND GOVERNMENT ENTITIES (ACT) June 11, 2008 41
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