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After coming across some posts about fraud, was wondering about this scenario:  A company's owner gives his 2 daughters a salary, maxes out their 401k contribution, and gives them a safe harbor and profit sharing contribution every year.  They get a W2.  We have tracked their vesting since they are on the census each year with hours listed. They do not work for the company. Ever. Not even for 5 minutes.  Could this be an issue? Is it illegal?

4 out of 3 people struggle with math

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Here is the similar discussion:

 

 

I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.

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2 hours ago, KarolineWriter said:

After coming across some posts about fraud, was wondering about this scenario:  A company's owner gives his 2 daughters a salary, maxes out their 401k contribution, and gives them a safe harbor and profit sharing contribution every year.  They get a W2.  We have tracked their vesting since they are on the census each year with hours listed. They do not work for the company. Ever. Not even for 5 minutes.  Could this be an issue? Is it illegal?

Not a lawyer and not someone who practices in the small plan 401(k) arena.  Just wondering - if the daughters have not ever worked for the company, not even for 5 minutes, what is being reported for hours?  In the other discussion thread, at least the owner's wife would go in an do something useful on occasion.  How could the company justify anything paid to the owners daughters here as compensation?  Wouldn't the 401(k) contribution be limited to what was actually being paid as compensation for services rendered (as opposed to what could only otherwise be characterized as distribution of profits or even diversion of company assets by the owner). How is any aspect of this not, at best, tax fraud?  As a taxpayer, I have no reason to want them to be able to do this.

Always check with your actuary first!

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The next obvious question is if they report a 1,000 hours how do you know the don't ever work for the company?

Are they telling you the census data is false? They could be doing that but it seems odd.  I say that because if they know they aren't working but reporting 1,000 hours that pretty much is admitting they know they are breaking the rules by sending false data because they know you need that data to make it all work. 

Then I guess the question really might be what is your obligation knowing the data is false?

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ESOP Guy - I've been doing this plan since 2005 and deal with the accountant a lot. He is the one who told me they don't work there. At all. They both have other full-time jobs. That's why they cannot make 401k contributions at their other jobs. Yes, they know it's false!  Yes, not sure what my obligation is, if anything.

4 out of 3 people struggle with math

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36 minutes ago, KarolineWriter said:

ESOP Guy - I've been doing this plan since 2005 and deal with the accountant a lot. He is the one who told me they don't work there. At all. They both have other full-time jobs. That's why they cannot make 401k contributions at their other jobs. Yes, they know it's false!  Yes, not sure what my obligation is, if anything.

I may be taking an overly cautious approach to this situation, but it is not my style to spend time socializing with my clients, especially if they are in prison for tax fraud.

Always check with your actuary first!

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Just now, KarolineWriter said:

I'm not socializing with my client and he's not in prison.

Trying to apply some subtle humor here (probably too subtle and too negative).  I meant socializing with the client after they are sentenced to prison for tax fraud.  As a fellow inmate.  Is it really worth your while to provide services to so sketchy a client?

Always check with your actuary first!

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Your knowledge is from a third party (the accountant) -- is he an actual employee of the business?  Who signs the 941/940 federal payroll tax reports? I would think he (and they) have much more liability than you do.

However, I wonder if some type of statement that they provide with the data about it "being accurate and true to their knowledge" would provide you any more protection? Or would that just prove that you had your suspicions?

But someone can have another FT job and still work in the family business from home, consulting, etc.  So not totally ruling out the fact that they might actually do some work at least... Our company has a few of these types of employees that one would never see "at work" but work from home, etc.

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But, this is really "hearsay." Just because the accountant said this doesn't mean it is true, and you have actual knowledge that fraud is being committed. I reiterate my opinion that it is not your problem. (I will also say that nearly every standard census gathering sheet that I've seen or the engagement letter, etc., would all say that you are relying on the accuracy of the information provided by the client)

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Interesting.  So, absent this (alleged) action, the taxable income of the owner (or perhaps the company) would greater, but each daughter's income generates more FICA tax.  Is that about it?

 

I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.

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18 minutes ago, david rigby said:

Interesting.  So, absent this (alleged) action, the taxable income of the owner (or perhaps the company) would greater, but each daughter's income generates more FICA tax.  Is that about it?

 

I guess from the IRS' view if the parent is in a much higher tax bracket then the kids there could be a net tax loss after the payroll taxes are taken into account. 

There could be estate tax consequences but that could get murky fast.

It would be an all depends on the facts kind of situation. 

However, I have never heard of the IRS going after a TPA because someone else is playing the tax bracket game with family members. 

I agree with others at this point it is alleged problems not known problems. 

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Just so we all learn together, let me ask what BenefitsLink mavens think about a variation on the hypothetical situation:

Assume the TPA is not a signer or preparer of any tax return.

The TPA performs all requested work using the data set its client furnished.  In delivering the TPA's report to its client, the TPA includes written explanations calling out that the owner's daughters' service and compensation information seems doubtful.  The TPA explains that the results would be different if the work assumed different amounts.  The TPA explains that the plan might be misadministered (and might be tax-disqualified) if a contribution was determined from an amount that is not really compensation for services rendered.

The employer/administrator receives the report, confirms that it understands the TPA's advice, and makes no change.  The employer and administrator file the plan's Form 5500 report and all tax returns of the employer and business assuming the daughters' false compensation and contribution, and the business's deductions and other tax treatments based on them.

By explaining correct information to the TPA's client, has the TPA's employee done what her profession's ethics rules ask of her?  Is there something further the TPA's employee must do?  Is there something further the TPA's employee should do?  What, if anything, must the TPA's employee refrain from doing?

For each of these questions, why?

 

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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Interesting exercise, but to be honest, I would never dream of questioning or "calling out" the service of the daughters, based upon the statement by the CPA that they don't work there. I feel like that crosses a line (what line, I'm not sure) but I frankly don't think it is my business to question that. Now, if the CLIENT had told me the daughters don't actually work there, that's a different circumstance altogether. Then I'd just resign as TPA. Can't correct egregious fraud under VCP!

P.S. - question for the CPA's out there- is the CPA violating any professional ethics by telling this to the TPA?

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