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Fiduciary Guidance Counsel

Refusing to submit your client’s Form 5500 report

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Have you ever had a situation in which you did not want to provide your usual service of electronic submission of a client’s Form 5500 report because you believe the report your client instructs you to submit would include a false statement?  (Your draft was accurate and correct, but your client tells you to change an answer to one that is false.)

 

How did you handle the situation?

 

If you haven’t faced this situation, how would you handle it?

 

Does a submitter have any responsibility for whether its client makes a truthful report?

 

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Yes I have had it happen before.  I handle it the same way every time.  I will not prepare or file a form with false information.  The most common request is to say that there were no late deferrals.  I always tell my clients what they need to do to correct the issue (and most likely I will do the correction for them) but I will not prepare or file a form with information I know to be false.  If the client insists, I tell them that I am happy to recommend several good local service providers if they are not happy with my services.  If they still insist, I terminate the relationship with the client in writing, citing my reasons for doing so.  I have terminated a handful of clients for this reason.

If Circular 230 applies (it does for me), I would point to § 10.21 (knowledge of omission) and § 10.22 (Diligence as to accuracy).  The loophole of reliance on others in § 10.22 clearly can't apply if you know the information is false.

What it boils down to for me is don't make your clients problems your problems.  

 

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We do not file false 5500s.  The closest we would come to that is if we don't have all the data and we don't think it is material we will file knowing there is an amendment.  By the way something like not having the stock appraisal for an ESOP would never be seen as immaterial.  That can be a problem with ESOPs.  

I see no reason to be associated with a false 5500. 

Although I will add I am a CPA so I have the added risk of losing my license over something like this but even if I wasn't I wouldn't do it.  The firm I work for management would never agree to a false 5500 filing.  They will deal with late forms and those costs over false filing or lost client. 

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16 hours ago, Fiduciary Guidance Counsel said:

In particular, are the stakes different if the TPA is not an IRS-recognized practitioner?

If the TPA is an ASPPA member, it would would violate the code of conduct.  I believe the same is true for NIPA.

As for the IRS, it is still an issue.  Even if you are not a practitioner covered under 230, the IRS can still make your life difficult if they find that you are filing or assisting others with filing false returns.

I can't put my finger on the exact session but the IRS did a phone forum or webinar on disciplinary actions in last year or two.  I can't remember the specifics but they clearly indicated that you can't shield yourself from discipline or sanctions by not being covered under 230.  

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RatherBeGolfing, thank you for the further observations.

 

Since Loving v. Internal Revenue Service, 742 F.3d 1013, 2014 BL 36052 (D.C. Cir. Feb. 11, 2014), it’s settled that the statute that grants the Treasury department power to make rules for practice before the Internal Revenue Service grants no power to regulate someone who is only a preparer.

 

That decision (which the United States didn’t seek review of) and Ridgely v. Lew, 55 F. Supp. 3d 89 (D.D.C. July 16, 2014) say that “Circular 230” rules can’t apply until one has submitted a Form 2848 or other power-of-attorney to be recognized as a representative.

 

(Penalties the IRS might impose on a preparer about a taxpayer’s inaccurate return are set by different statutes.)

 

For many service providers to retirement plans’ administrators, the reason not to be associated (however remotely) with a Form 5500 report that includes a false statement is simply that it feels wrong.

 

Thank you for helping me build an ASPPA continuing-education course.

 

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The preparer of a Form 5500 that contains false information can face consequences from agencies other than just the IRS.  Years ago, we helped a profit sharing plan where before coming to us, a Trustee withdrew most of the plan assets over the course of several years.  His attorney sent him to us when the DOL came to visit.  The prior TPA initially tried to "help" by retroactively papering the withdrawals as participant loans.  When the amount exceeded $50K, the prior TPA came up with the idea of showing part of the commercial real estate owned by the Trustee on the Form 5500 as belonging to the plan. The 5500s each year also said there were no prohibited transactions.  The DOJ paperwork I saw listed the Trustee and prior TPA as co-conspirators and described the loan paperwork and 5500s as evidence of the conspiracy.  The Trustee repaid the amounts with lost income and received deferred adjudication.  I don't know if they filed criminal charges against the prior TPA.  At the very least, I imagine he had a rather long and unpleasant visit from the DOL.   

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If an actuary is involved in (knowingly) participating in an inaccurate filing, it will (probably) be a violation of the Actuarial Code of Professional Conduct.  Other professions likely have similar standards.

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