Tax Cowboy

Group, Taxpayer received DOL inquiry and IDR for its ESOP and 401k plan right before Covid. As I began coordinating with service providers, Covid pandemic hit. Of the almost 100+ IDR requests I had only received a handful. The investigator provided us with an extension until end of May. I note the DOL Notice 2020-01 doesn't provide any relief for enforcement actions at this time. I may not be looking in the correct Govt website or other forms of guidance for relief. Anyone know if the Dept of Labor will allow enforcement actions to be suspended while businesses (and my taxpayer/client) are still dealing with the pandemic? Thoughts and comments appreciated. Thank you

Thank you for very helpful responses!! Much appreciated.

Group: I am looking for studies performed after 2008-2010 market crash/recession that shows a greater number of employers wanting to set up an ESOP vs. that of having employees retirement at risk of wall street casino. I have found a few but not sure they are exactly what I'm looking for. Thoughts and comments appreciated. Thank you

Group: Clients' retirement plan (ESOP) is being audited by DOL for tax year 2017 to present. As a side note, clients' same retirement plan (ESOP) has two audits running concurrently with TEGE and SBSE. My queries relate to properly responding to initial IDR and whether stating request is outside of statute of limitation is appropriate. 1. Per IDR, DOL is requesting records (such as articles from plan sponsor entity which was set up approx 10 years ago). Is it appropriate to state in response: Outside of statute of limitation. How do other practitioners respond? Send everything? 2. Also, IDR is requesting service provider fee agreements which would include my own attorney engagement letter. I've read conflicting articles and research saying that attorney fee agreements are not protected by atty-client privilege and other resources saying they are. I'd prefer not to give the govt carte blanche. Thoughts and comments appreciated. Warm regards Joe Dadich, Esq.

Group: Facts: Potential Biz Owner Client says in 2018 he started process of setting up S ESOP with effective start date of June 30, 2018. For a number of personal reasons and issues with a minority owner he has not gone through the steps. Fast forward to Nov 2019. Clients' cpa insists he can still set up S ESOP with June '18 start date.. And merely file late 5500's, pay late penalties and fees since biz owner intent was to have retirement plan set up for 2018 tax year. And I have always been under impression that retirement contributions (like ESOP'S) are due by Sept 15th of following year. Assume Client cpa and attorney create and memorialize all necessary ESOP docs with effective 2018 tax year. And late contribution made in Dec 2019 (two months past deadline). Q: Even if Biz owner intent was to set up ESOP with an effective 2018 tax year, has anyone had success arguing with an auditor of reasons for late contribution? Any case or IRC, Dept of Labor guidelines that biz owner can rely on? Thoughts and comments appreciated. Thank you Joe Dadich, Esq.

Thank you for your responses. First response re: ESOP name, I misspoke, the only name discrepancy is between actual entity audited which was the plan sponsor (Entity A, Inc.). My understanding (and probably heart of my question) is that the auditor themselves would have reviewed and audited the owner of said plan sponsor. ie. the ESOP (I'm leaving out the full name for simplicity. Entity A, Inc. Employee Stock Ownership and Profit Sharing Plan aka 'ESOP'.) Fast forward, the ESOP is now under audit for same years. My question pertains to whether or not Entity A, ESOP (condensed name for simplicity) has a leg to stand on that it was already audited for years in question? Second response: I don't know why Entity A - plan sponsor - did not file 5500's. The TPA reflects the 'Entity A, Inc. ESOP' as the plan name on the 5500's. Entity A, Inc. is noted as plan sponsor on 5500. To your second point: 'what would that have to do with an audit of the plan'. I'm trying to find support/case/other arguments that show that 2012/2013 audit of plan sponsor (Entity A, Inc. in my facts) was a de facto audit of the 'ESOP Plan' itself. Therefore, no reason for the Service/IRS to have ability to audit for those years. My possibly thin argument is that an auditor reviews the tax returns of entity under audit along with affiliated entities, and other relevant tax information which includes its owners. The auditor (from my own discussions with client/taxpayer) says that the auditor reviewed 5500's that were filed. I note that 'reviewing a 5500 may not be actual 'auditing' of said filing. However, why would an auditor review a 5500 if they were not looking for compliance? just to look at it? Wouldn't the converse be true: if the auditor found discrepancies in a 5500 while auditing only the plan sponsor (Entity A, Inc.) in this matter, the Service would follow-up with new IDR's and possibly resulting in Notice of deficiency or disqualifying the plan itself. Yes, it's a long shot, but I doubt this is the first time for IRS auditing plan sponsor one year then waiting years later to audit the ESOP Plan itself. In the end, i'm looking to see if this meets definition of Collateral Estoppel/Res Judicata by any thin argument/stretch. Thank you for all thoughts and comments. Best, Joe Dadich, CPA, Esq.

Group: I may not state this properly so bear with me. Entity A, Inc. sells 100% of stock to an ESOP with name of 'A, Inc. ESOP AND PROFIT SHARING PLAN' in 2011. ESOP files for EIN and uses such for all 5500 filings. Entity A is audited for tax year 2012 and 2013. Which resulted in a no change determination letter. Fast forward, Entity A ESOP is now under audit for same years (2012 and 2013) and all years through 2017. I'm coming in late to the proverbial game as 2848/attorney and client has already signed audit extensions prior to my involvement. Q: Are there any cited cases/internal revenue manual cites/other supporting sources, that stand for the proposition that the ESOP was effectively audited for 2012/2013 with these facts? I note there seems to be very little case law about whether or not these facts can support a collateral estoppel or res judicata argument. And it's usually not favorable to taxpayers. Thoughts and comments are appreciated. Thank you Joe Dadich, CPA, Esq.

Group: In 2017 taxpayer/client sets up a leveraged esop where loan payments were to be made by Oct. 15 of each successive year. Client has recently began an audit by TEGE dept.. No IDR response nor any site visits have taken place. Client failed to make first year loan payment due Oct 2018. Do I wait to cure late loan payment before auditor even questions why payment was not made? After discussing with the TPA I'm leaning towards curing late loan payment + interest prior and make this part of our response in an effort to get in front of potential issue. What has been your collective experience in auditors view on late ESOP loan payments and curing? For what it's worth, there are a number of communications from advisors informing client to set up separate ESOP account but no account was even set up. Thoughts and comments appreciated. Warmest, Joe Dadich, CPA, Esq.

That is exactly what I'm looking for! Thank you. Best, Joe

Group: Clients TPA files 5500 annually for their ESOP. Assume the 5500 shows plan assets of $200k. Isn't this the liability owed to participants? Is there an Internal Revenue Code/Dept of Labor/ERISA cite/support that says the repurchase obligation is borne on plan sponsor? in other words, I know the employer/client/plan sponsor ultimately has liability to pay for that repurchase obligation but I'm looking for a regulatory cite/IRC/other to support this statement. Thoughts and comments appreciated. Best, Joe Dadich, Esq.

Group: Does anyone have a sample (or a resource/guide/service they've used) questionnaire they pass out for participants in an employer sponsored plan? like a 401k, Defined Benefit, Defined contribution plan. For instance, a questionnaire asking if the employee/participant liked a certain provision of their benefit plan (like a 401k matching provision) among other questions. Something to gauge if the employers intention and reasons for setting up the plan are being met on an annual basis. Thoughts and comments appreciated. Warmest, Joe

Very good points!! Thank you. G8Rs, you mentioned that only recently has the IRS allowed submissions made by 12/31/18. Is there a regulation cite? or is new regulation buried deep in 2017 new tax law?

Group: Client has extended a number of SOL time limits in current audit. A former advisor was involved over last few years of TEGE audit. TEGE auditor now wants to extend 3 years of audit (2014, 2015 and 2016) to June 2021. I have been trying to obtain copies of which extension form was used: either 872-A or 872-H (to extend time for Trusts). Q: Does a termination form 872-T apply to both of these extension forms? Q: Where do I find form 872T? I have tried searching IRS websites and other sites but to no avail. Q: Is 872T a notice placed on your own letterhead? Thoughts and comments appreciated. Warmest, Joe Dadich, Esq.

Group, For many years now I've been under the impression that there is no requirement for a plan sponsor to apply with the IRS for an ESOP determination letter. Rather, my understanding has been that many TPA's are volume submitters. And in the few TEGE audits I've been involved with, the auditors have all accepted the ESOP AA and Plan documents provided without a determination letter. Is there a code cite/Dept of labor rule that requires an ESOP plan sponsor to apply for a determination letter? Thoughts and comments appreciated. Best, Joe Dadich, Esq.

Group: Original notice of audit was for tax year 2015 with the usual suspects/IDR's for an ESOP audit. This original notice was back in late 2017. We just received a new follow-up IDR (Jan 2019) asking for additional info for tax years 2016, 2017 and 2018 Question: I recall (but can't cite right now) reading that the Gov't can expand audit tax years to a year prior (2014 in my case) and one year after (2016) without any additional notices. Anyone else take this stance in an audit where they respond to an IDR saying the tax years are out of the original notice period? any cites? Or does this just prompt the auditor to issue a new notice for the tax years in question? Thoughts and comments appreciated. Warmest, Joe

Thank you Cardscrazy!! So, in the interim, TEGE sent IDR requesting among other items, copies of all notes receivables and question on 'How did Trustee plan on paying back Note Receivables?' This isn't that much different than what I've seen in past audits other than the following: 1. The notes receivables from what I was told with this taxpayer/ESOP were used for expansion of business and were collateralized in case of trustee passing with a life insurance vehicle. My understanding from prior advisor (who is no longer on board as POA/2848) is that to create a greater ability to pay back notes receivables and biz succession in the event of death/disability. My question: Other than replying "the notes receivables were entered into at arm's length transactions using IRS AFR with interest only payments", is there a more focused response you would use? would you reply with case law? 2. Another item I'm seeing is that auditor is asking for valuations for a few years. Usually not an issue. I've inquired with the TPA handling administration of plan and they inform me the past advisor would normally 'email' the valuation to TPA with rationale for value. To make more of a mess, the admin individual has since left the TPA. I believe the worse case scenario (and I've seen it before) the determination requests the taxpayer (entity) to have a new appraisal performed. Q: Is there a response you would provide to create less of an issue? Thank you for your sage advice. Best, Joe

Group: I apologize if this is not the proper forum as I didn't see a forum specifically for audits of qualified plans (ESOP's in my case). Client's ESOP has been under audit for close to 2 years for plan year 2015. It's been extended a few times and I'm not exactly sure why. I believe one reason was that due to the Hurricane from 2017 as client is based in FL and the Miami TEGE office is handling matter. I'm currently reviewing whether or not to come on board to assist. The current client rep will most likely be terminated for a number of reasons. I believe the main sticky issue has to do with leased employees. I don't have all the info just yet and not sure if soon-to-be-terminated rep will be helpful. I'm hoping the TEGE auditor will at least provide the sticky issues to me when I'm clients POA/2848 rep. Q: For practitioners who handle TEGE ESOP plan audits do you normally sign the SOL extensions? I'm usually of the opinion that signing once or twice is in clients best interest. But I've never had the situation where there is a third request. What is the worse case scenario? TEGE issues its determination immediately? Then client has to be prepared to file admin appeal? then possibly Tax Court petition? Thoughts and comments appreciated. Resource/Guide in TEGE audits/appeals matters? I've had successful TEGE audits and never had to worry about an appeal. Best, Joe

Group: Facts/assumptions as follows. Client owns an S-Corp and sets up an S-ESOP with 20 eligible participants/employees. Value of S-ESOP stock is $20k when sold to ESOP Trust and loan is established to be paid off within 5 years. 100k shares outstanding. Assume 6 yr step vesting. ESOP Loan paid off by yr 3. TPA informs me that stock is allocated proportionately to payoff of ESOP loan. By yr 4 all of the 100k stock has already been allocated to the above-referenced 20 participants. Q: What happens when 3 new employees begin work in yr 4 and begin to vest by yr 6? Q: How do you properly allocate shares/benefit to new employees? Is TPA correct? I'm informed by the TPA that the only way to provide a benefit to the 3 new employees is if - and when - the original 20 ee's retire/leave and then forfeit their allocated stock shares. At such time those retired shares (proper terminology?) can be allocated to the 3 new ee's. Can Plan Sponsor issue additional stock for allocation? or is the TPA correct? I can't seem to find guidance on this matter. Thoughts, comments and resources would be much appreciated. Thank you!

Thank you! I've been advised by the TPA handling this particular S-ESOP that once a plan terminates, there is a "reasonable" time to distribute plan benefits. And I note from another Q and A on this message board that the audit itself may provide for the reasonable basis to wait for final distributions. ie. if audit concludes in april 2019 and plan assets not distributed until June 2019. My question: I can't find the Dept. of Labor/IRS language that says "plan asset must be distributed within a reasonable time". I know it's a term of art but wanted to see if someone had a cite. Are you a TPA for ESOP's? S-ESOP's? Thank you again for your help.

Group: I have a potential client who owns a company that has sponsored an ESOP some years ago. This has become costly to the client and too many regulatory hurdles in their opinion. They'd like to terminate at end of this year (12/31/18). The client is under a TEGE audit. Can the client terminate the plan while under audit? The audit years in question do not relate to 2018. Thoughts and comments appreciated.