Big Oops

[Christine Roberts]

Sole practitioner sponsors Keogh/PSP for himself and spouse.

Due to financial problems, takes a loan of 100% of plan assets in 1997, to use for living expenses.

Does not file 5500 EZ for 1997 or subsequent.

Now has letter from IRS requesting filings from 1997 on.

Cannot restore 100% of plan assets but could probably restore 50% of borrowed assets.

Is there a voluntary disclosure program that offers a way to ameliorate or possibly resolve this situation?

[Guest SteveR]

I don't know that the IRS would allow for a "50%" correction of the defect.

I would seriously look at accepting the plan as disqualified and use the 50% available for payment of back taxes and penalties on the contributions and earnings.

[Christine Roberts]

Thank you for your response. I am trying to rule out specific voluntary disclosure/compliance programs, so any further comments from any source would be appreciated.

Presuming (however unlikely) that a voluntary disclosure/compliance program were available, could any advantage be taken of the fact that EGTRRA would now permit a plan loan to a sole proprietor (albeit not a loan of that size)?

[Guest merlin]

Some people have read the Committe Report togive a blanket amnesty for loans to previously disqualified persons.I disagree but read it and form yourown opnion. But I don't think any reading will helpyou with the 100% issue.Did the plan have an in-service distribution provision in 1997? SteveR's response may be the best way to go. It sounds like this guy shouldn't have aplan in the first place.

[Belgarath]

I agree with Merlin that the EGTRRA committee report does not give the blanket exemption. But maybe I'm wrong, and this is the approach that will be taken. Certainly would be nice. I would look into the possibility of a "John Doe" submission under EPCRS. See Revenue Procedure 2001-17. This would give him the opportunity to see if they would accept a solution that he can handle. I'm personally a bit dubious that they would accept the 50% solution, but perhaps if it is gussied up a bit, and if you have a kindly reviewer, maybe something can be worked out. Good luck!

[Christine Roberts]

Thanks for all of the input; I received good advice off-board to simply treat the plan as terminated in 1997, and treat the loan as a distribution of 100% of plan assets as of that time.

Still has a potential for DQ but given that we will be terminating the plan and including all assets in taxable income, and that no rank and file participants are involved, I would hope that the IRS would not pursue the matter further.

[Kirk Maldonado]

Merlin:

Isthespacebaronyourcomputermalfunctioning?

[Guest merlin]

NotthatIknowof.Whydoyouask?

[Christine Roberts]

....and here I was hoping for some "pearls of wisdom" from Mr. Maldonado on the situation I describe!

[Kirk Maldonado]

Christine:

You should know me better than that. How can I ignore an opportunity like that?