Audit Triggers

[Guest Laura]

i noticed that the revised 5500 series does not include a question re: 5310 filing in the event a plan is terminated. the 5310 question used to be an audit trigger for terminating plans.

i have a client that wants to know the risks of not filing form 5310. i'm trying to get a handle on the potential audit risk. anyone have any experience terminating a plan but not filing it via 5310 during or after the 1999 plan year (when the 5500 was revised)?

any input is greatly appreciated.

[MJ Hartman]

a 5310 is not required to be filed for a terminating plan. Unless you believe there is an absolute reason to file; ie the business being sold or liquidated, I don't think you're risking an audit by not filing a 5310. In fact most of the audits that I've seen lately were triggered by late deposits of 401k deferrals or after an audit was done by the DOL. update the plan for GUST, etc. and you should be okay.

[mming]

I agree that not filing a 5310 is a legal option that usually doesn't warrant IRS suspicion. However, it's a good idea to take into consideration the amount of the resulting distributions. Since 1099-R forms must be filed when distributions occur, the IRS will (or should) see if someone received a large payout. If they see that one participant received, e.g., several hundred thousand dollars or more, they may be interested in proof that it was all legit, especially if it was ROed and no taxes were paid. Also to be taken into consideration is the client's risk tolerance and whether they can wait to receive the distribution until the IRS has approved the formal termination. You can tell the client the pros and cons for filing and not filing the 5310, but ultimately it should be their decision. Sometimes, of course, a client may imprudently insist on not filing a 5310 to save on admin fees, even though they're due to receive a 7 digit distribution.

[Guest Laura]

this plan has many many problems. the missed a partial termination. its been in place since 84 and never rec'd a determination letter. it doesn't meet the definition of domestic trust and they didn't file the election in 98.

they want to quietly terminate. i'm afraid that the client will get nailed on audit. i'm afraid that there is no such thing as a quiet termination. in the old days, answering "yes" to "did the plan terminate" and "no" to the 5310 question triggered an audit.

it sounds like termination of a plan is no longer an audit trigger however.

[Earl]

In my experience with terminations the total amount of the plan termination distributions is the determining factor on being audited. I have never seen any evidence that an amount on a 1099 was involved, rather the total amount of the Trust was targeted. In fact I have evidence to the contrary.

Several times I have had plans audited upon termination distribution that WERE filed and the auditor had no knowledge if they were filed (for termination DL) or not. At that point they reduced the scope of the audit to post DL transactions. Very simple audit. Show the Distribution Notices and elections, 1099s and investment statements and that was that.

My opinion is that a quiet termination is done by filing for a DL. That review is very easy to control and is very predictable as to what they want to see. The DL review is almost exclusively form rather than operation. The field audit is much more operation than form. I would wager that you could produce plan documents all day for a DL submission..... A review of some of the operational issues seems to be more scary for you.

If you have a plan that is squeeky clean, why bother filing. Let them audit it. If it is dirty, file and be in control.

That's my take anyway.

[Kirk Maldonado]

I concur with Earl, with one caveat.

Even if the plan is squeaky clean, many clients, when given the choice, would prefer to avoid an IRS audit, even if it delays the termination of a plan several months and costs some money. It should be the client's determination, based about his or her risk tolerance level.

[Earl]

That is a good point. I always tell them it is my job to recommend that they file as that is the conservative approach.

I tell them it is a not a guarantee against future audit and that I also recommend that they ask their CPA as I charge for this optional service and I don't want them to think that I am working them over for fees.

Usually the CPA defers to me anyway and the client makes his own determination based upon his experience and comfort level in dealing with the IRS.

[Guest Laura]

thank you. i didn't know that termination distributions were an audit trigger. assets of the plan at issue are approximately $500,000 and the plan is a defined contribution plan.

will the relatively small size of the plan factor into the audit risk? in other words, termination distributions will total approximately $500,000. will this type of activity even show up on the IRS radar come audit time?

[Earl]

thats hard to say really, depends upon the work load of your local office. I know someone in texas that said virtually all her plans had been audited. Maybe 10% of mine have been.

And she worked in the same plan size market as I do.

Here, I would think no... But in Mass... I can't say.

[Guest michael4509]

i started a new 401K plan for my employees, so that they can direct their funds into whatever risk category they choose.

during the delay between the filing for the determination letter for terminating my old defined contribution pension plan (est. 1987) and the reply from the irs, can i, the owner of my company, direct the trustees of my old defined contribution plan to deposit the funds into a fixed return money market account?

[AndyH]

Laura, I agree with you about the 5500 and audit trigger. The question, which most people assumed to be an audit trigger, is no longer on the 5500.

Having said that, I was told once by an attorney who assists with distressed plans that her experience has been that the 5310 filing question on Form 5500 was not more likely to generate an audit.

Maybe it should have been an audit trigger but never was! Either way, the question is gone now.