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Loan default correction


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Long story short - participant loan apparently defaulted in 2018. Started making payments again in 2019, but should have been a deemed distribution.

Too late to correct under SCP, but can be corrected under VCP, as per RP 2019-19, Section 6, .07(3)(d).

Here's my question - the person involved is the company owner. Has anyone submitted under VCP in such a situation, and was there any problem with the IRS not approving it because it was the owner/fiduciary who defaulted?

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  • 4 weeks later...

Not exactly your case but we had a client who missed loan repayments to the point of where it should have been a deemed loan. We explained that it may be correctable under SCP or VCP but warned him that he was in complete control of his loan repayments and because of that, the outcome may not be 100% certain. He then countered by telling us he was a big boy and that he will deal with the consequences of his actions (or mis-actions). He then promptly repaid the $50,000 plus interest. Three months later his plan was audited and I had a few discussions with the auditor and his supervisor. The supervisor told me that unless the participant is an employee where the employee is relying on the company payroll department, there is no possibility of correcting the loan. The client then called me and explained that the year of the taxable distribution was a very low tax year and that he did not mind having a non-taxable basis in exchange for the taxable event and a relatively small penalty. So after that, we just gave in to the IRS.

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  • 2 months later...

Professional firm of partners.

One Partner, a key employee, never started loan payments and now that we are passed the correction period, he would like to be up front and correct the loan by repaying missed payments with interest, reamortizating and submitting under VCP so as not to default. 

Similar to above posts, and Form 14568-E (rev 6-2018) Section IIB, he cannot use this form to file.

So is a VCP not possible in this case? Best or only solution is to default the loan?

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follow up to my last post - cpa has advised plan sponsor to adjust the prior year contribution and treat a portion of that as making up the loan payments on a timely basis.

The outstanding contribution will be made up timely.

Not happy about this though.

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18 hours ago, TPApril said:

Professional firm of partners.

One Partner, a key employee, never started loan payments and now that we are passed the correction period, he would like to be up front and correct the loan by repaying missed payments with interest, reamortizating and submitting under VCP so as not to default. 

Similar to above posts, and Form 14568-E (rev 6-2018) Section IIB, he cannot use this form to file.

So is a VCP not possible in this case? Best or only solution is to default the loan?

If this gets challenged it is the retroactive changing of what the deposits were.  I have always thought this is a bit aggressive.   It happens in ESOPs somewhat frequently when they find out they are violating 415 so they suddenly claim the contribution was a dividend.   I haven't seen a plan that does this get audited but my guess if the auditor detected the retroactive nature of the transaction that is where the objection is going to be.  

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