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Tax Cowboy

401k TEGE determination / Sanction Range

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Group:

Clients 401k has been audited and the TEGE Dept had found 3 errors of the 401k plan.
 
The irs is still in process of issuing its sanctions amount. 
 
Q: As the 401k Audit itself only related to tax years 2017 to present, isn't there a SOL for any sanctions outside of the 3 year SOL? Assume no consents to extend were signed 
 
Q: If the errors are solely with the 401k plan administrator and outside of the control of the owners themselves, is there a way to determine how the IRS will determine sanctions?
 
One determination is that a participant was never issued RMD's over a period of 3 years.
 
In your experience what amount of sanctions does the IRS usually assess?
 
Thoughts and comments appreciated. 
Thank you 
 
 
 

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Not knowing the nature of the issues or the size of the plan, it's hard to come up with an estimate of sanction amounts. Here is the IRS description on how they arrive at sanction amounts.

https://www.irs.gov/retirement-plans/audit-closing-agreement-program-general-description

Using this and the links, you can come up with a minimum and a maximum sanction. Other posters here can probably help where your case will likely fall in the spectrum, provided you supply more detail on the failures. In the case of the RMD failure, it will make a difference if the participant was just an average rank and file employee or one of the executives or owners.

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Thank you Alonzo.

A few specifics is that this is a relatively smaller plan. 20 participants max.

roughly $1mm of funds with American Funds.

best

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Remember that this is (or should be) a negotiated settlement, so IRS will likely come in initially at the high end and the sponsor or its representative should be prepared (with evidence/facts, not simply narrative - we didn't know, thought TPA handled it all) to negotiate. If you can get half-way (or close) between initial IRS amount and the VCP sanction, I think that is a reasonably favorable outcome unless truly extenuating circumstances justify an even lower sanction. Good luck.

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7 hours ago, Tax Cowboy said:

Q: As the 401k Audit itself only related to tax years 2017 to present, isn't there a SOL for any sanctions outside of the 3 year SOL? Assume no consents to extend were signed 

Plan disqualification would affect all years, and going forwarded. The IRS could only tax the taxable persons (participants, plan trust, and possibly disallowance of employer deductions) for open years, so in theory the SOL enters into calculation of the maximum payment amount, but if you are disqualified for any open year (and of course you would be), all the vested account balances are income to the participants, so it's such a big number that the SOL is not all that relevant.

 

7 hours ago, Tax Cowboy said:

Q: If the errors are solely with the 401k plan administrator and outside of the control of the owners themselves, is there a way to determine how the IRS will determine sanctions?

You mean the "recordkeeper," because the "administrator" is in fact the employer. I don't think this enters into the IRS's thinking at all. It might work for some agents, but others might actually react negatively that plan sponsor is trying to avoid responsibility. And sometimes they will assume you can be indemnified by the recordkeeper if it's their fault.

 

7 hours ago, Tax Cowboy said:

One determination is that a participant was never issued RMD's over a period of 3 years.

This could be not that big a deal if it is a small account. If it is a significant owner and the RMDs would have been large, exam agent will probably view it as a significant failure.

 

7 hours ago, Tax Cowboy said:

In your experience what amount of sanctions does the IRS usually assess?

Would depend a lot on the other errors and why the occurred, the detail for the RMD error, and also the size of the plan, the extent to which it benefits HCEs as compared to NHCEs, and the income levels of owners.

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