What ideas do you have to reduce (or eliminate) the IRS penalty.


A 1994 5500C/R was filed for a 40-employee profit sharing plan indicating that there were 2 employees who terminated vested. No SSA, however, was attached, due to an oversight by their administrative firm (since fired).

About a year later, the IRS sent a form letter asking for the SSA. The company sent in the SSA.

This year, the IRS sent letter(s) to the company indicating a penalty of about $7,500 ($25 per day times 300 days, roughly), plus interest. Naturally, the company ignored the letter(s), until the IRS sent a Notice of Intent to Levy. Then, the company got interested.

What do you think of the following issues to raise with the IRS.

1. Shouldn't the penalty should be $1 per day per participant (hence about $600 plus interest) rather than $25 per day. (I'd probably be satisfied with this result.)

2. This isn't material. The account balance for Participant Number 1 is about $50 (he still cannot be located). The account balance for Participany Number 2 is about $9,000; it was paid in 1996, and he is the brother-in-law of the owner. (I'm stretching here.)

3. There are extenuating circumstances. The Chief Financial Officer (responsible for the Plan around that time) died in early 1995. The business owner is ill (heart condition, surgery). Also, the administrative firm was incompetent and has since been fired. (I'm stretching here.)

[Of course, the company could go after the prior adminstrative firms for damages, but that's another matter.]

Thanks

I'm not familiar with the amount of the penalties in this situation.

However, I can comment as to how the delinquency period is calculated. The Sponsor is not required to report an individual on the SSA until the plan year following the plan yar in which separation occured. So no violation would have occured until the sponsor neglected to include the participants on the 1995 SSA.

I hope that helps.

The administrative penalty for not filing a Schedule SSA is $1 a day for each participant per the 5500 instructions.

I would respond to the notice explaining any circumstances that could be deemed reasonable cause for failure to file the SSA. I have helped a client file a Form 5500 almost two years late and the IRS waived penalties due to reasonable cause. It sounds to me like the reasons you are stating sound like reasonable causes for the confusion. I think the client may have had an even better chance if they had responded to the initial notice, but its worth a try. Then, if penalties do now get waived I would try to have them reduced based on the fact the 5500 instructions refer to the $1/day per participant. Good luck!

[This message has been edited by Dawn Hafner (edited 10-22-98).]