IRS Audit - missing original plan document

[Guest ubpMR]

A former client of mine is being audited by the IRS for 2000. The IRS asked him for the original plan document, effective 1/1/90. My company took over the case in 1992 but we cannot find the original document and neither can the client (but we & the client remember that it was a KPMG prototype document). The IRS has told my client that since the plan document cannot be located, he believes the plan never to have been qualified, even though subsequent document have been located and the plan has been operated properly. So, the IRS wants to go back three years (as per the limitation period) and tax the client what the employees would have paid on their 1040s if no plan existed. We estimate the deferrals to be $300,000 for that period making the fine with an assumed 25% tax bracket $75,000!!!! Is it me or is this IRS auditor being totally screwy. The auditor has refered my client to Rev Proc 2001-17 which I have not read yet.

Any comments?

[Mike Preston]

What was the date that the first document that the client actually has was adopted? Was that (or any subsequent) document submitted to the IRS for a letter of determination?

[Guest ubpMR]

The document was adopted sometime in 1990 with an effective 1/1/90 date. The document was a prototype so it was never submitted to the IRS.

Subsequent documents were prototypes as well. The oldest document we have is a restatement from 1992, effective 1/1/92.

[pjkoehler]

upbMR: You clearly have a plan establishment issue for the 1990 and 1991 tax years. Unless the IRS is asserting tax fraud, these are not open tax years. You say you have a signed original amendment and restatement, presumably timely adopted to be effective 1/1/92. If the agent is there to examine the plan for the 2000 plan year, I don't see why you should produce any information or documentation that relates to the plan in effect prior to the immediately preceding restatement and all subsequent amendments. I think you should tell the agent you don't understand how superceded plan documents are within the scope of his document and information request for 2000 (without commenting on its availability). If you don't get a satsifactory response, ask him to have his supervisor address your question.

[Kirk Maldonado]

I seem to recall that there was a prior discussion about what to do when you can't find the plan document. You might want to search the prior threads to see if there was anything useful in them.

[Guest b2kates]

I agree with the comment that the statute should be closed. Do you know if Schedule P has been filed consistently with the 5500?

Has the plan required an audit having more than 100 participants. The document should be in the permanent audit files.

[Mike Preston]

If you have a trail of documents from 1/1/92, and those documents can be demonstrated as qualified, then I think you should just respectfully disagree with the auditor and have them start formal disqualification proceedings. While I woulnd't want to do this unless I was working in conjunction with an ERISA attorney on the issue and I would want to be darn sure that the documentation in question is not flawed in any manner (for example, is the document a "standardized" prototype and were all the required amendments made on a timely basis and does the plan's operation conform to the document's provision) if the supervisor has his or her heels dug into the same sand as the auditor, you may have no other choice. At some point, I would hope that somebody at the IRS would recognize that an LOD is not required and your later amendments and restatements were enough to establish the plan as qualified from adoption date forward.

There is a case somewhere that held the absence of the plan document was not enough to generate disqualification. IIRC, it was a circumstance far more suspect than yours. Nonetheless, the court decided that disqualification was not appropriate. I don't remember the cite, unfortunately, but maybe somebody else remembers it.

[GBurns]

I suggest that you pay particular attention to the advice given by pjkoehler.

The examiner is there for a particular year and is not allowed to go on fishing expeditions. Do not allow it. Do not give any info for any other year or item that is not specifically listed in their request for production or deficiency notices.

If the examiner wants other years there is an established procedure and sequence of events that must occur so as to open those other years.

[mbozek]

You need to refer this matter to an experienced tax practitioner. The statute of limitations for collecting back taxes is 6 years where a return is filed. The worst case scenario is that the plan was not qualified for 1990 and 1991 but no taxes can be collected for those years since the s/l has expired. The IRS position is quite stupid because if the plan contributions for 90-91 are disqualified then the allocations for those years are now after tax amounts for which no taxes could be collected when distributions are made. The client could claim that it had two separate plans- the disqualfied plan for 1990 and 91 and the restated plan beginning 1992 which is qualified. PJ correctly adds further limitations to an audit: it is not a fishing expedition to review actions in closed tax years beyond the open years for an audit. What your client needs is experienced counsel to rebut the agent. It will cost money but it will get the IRS off their back.

[Mike Preston]

While I generally agree with mbozek's writeup, I think the courts have held that if the plan sponsor treated the plans as qualified in 1990 and 1991 (very unlikely for any other result) then something which is generally referred to as the "duty of consistency" would require the amounts paid from the plan to be exclusive of after-tax amounts, even if the IRS attempted to disqualify the plan for 1990 and 1991. Only if the IRS was successful in disqualifying the plan and managed to have everybody's tax consequences for the years in question (1990 and 1991) modified, with the appropriate adjustment to taxes paid, etc, could the taxpayer argue that the 1990 and 1991 amounts were after-tax.

[mbozek]

MIke: Duty of consistency only applies to same taxpayer who makes tax error and later trys to benefit from it. See Estate of King, 1984 tax ct case for precedent. In King a partnership failed to include pship income as income to partners . After s/l for taxing the partners expried IRS audited pship and attempted to tax partners on income that was not included in pters tax return for closed year. Tax ct held that failure of pship to include income to partners could not extend s/l for partners and income was now not taxable because s/l expired. Since disqualification would be attributed to employer sponsoring the plan the employee could benefit from amts being treated as after tax income.

[Mike Preston]

I'm not sure I see the direct analogy to a qualified plan in the example you cite, but I'll take your word for it. I think there is a more recent case, though, dealing with disqualification and the ramifications thereof that argues the other way. Maybe. I think it had something to do with a rollover. Something about how a taxpayer failed to rollover in time, didn't claim the income, now wanted to withdraw the monies from the IRA and the IRS ruled that since there wasn't tax paid when received, they couldn't claim that the monies withdrawn now should have been taxed before (the s/l had clearly run on the year when the rollover took place) and were therefore exempt from taxes now. I see now that this is the same taxpayer that made the mistake, though, so it isn't directly on point to your example.

I'd bet that the IRS wouldn't go gently into the good night, King precedent notwithstanding, though.

[Guest Therese]

I don't know if this will help, but I thought it was an interesting way to show that a lost document did exist: http://www.benefitslink.com/reish/articles/rl0007.html

[Fred Payne]

I like pjkoehler's advice, but what if you are seeking a letter of determination for the termination of a plan? Are you not required to submit the original documents?

[Mike Preston]

I thought the rule was that you had to submit documents since the last document that received a letter of determination. If you have a document that was deemed to have that letter of determination (such as a standardized prototype), you submit that document and any subsequent modifications.

In some circumstances, such as where the benefits under the plan are being provided based on grandfather provisions and the new plan doesn't specifically identify the grandfathered benefits, it may be advisable to provide the older documents for clarification purposes.

[mbozek]

Mike: the case you are thinking of is Estate of Ashman v. IRS, 9th circuit, 10/26/00 in which a taxpayer failed to rollover $100,000 of a $725,000 within 60 days of distribution in 1990. However taxpayer filed a return showing that entire 725K was rolled over. After the s/l expired in 1993 taxpayer recieved a distribution of 100k and tried to claim that it was not taxable because the initial 100 k was not rolled over within 60 days of distribution. The ct applied the dutiy of consistency because the taxpayer had shifted position in reporting the amounts. The estate of King, 48 TCM 450, 7/9/84 stands for the opposite situation-- a taxapayer who fails to include an item of income because of another taxpayer's mistake can assert the expiration of the S/l. Remember even after the 1998 IRS reform act the IRS has no obligation to cite positions favorable to the taxpayer.

[Mike Preston]

Thanks for the cites.