Failure to File 5500EZ

[Guest Thornton]

A sole proprietor establishes a p/s plan through a brokerage house. He claims that he was never told a Form 5500 was required. He has never had a common law employee. The assets exceeded $100,000 ten years ago. He was told by a new broker about the filing requirement, and is nervious.

He has contacted me for advice. We can of course use DFVC at $1,500 per delinquent return, or $15,000. My choice is to prepare the returns and file with the DOL with a letter of explanation ("tear stained letter"). We have a sole proprietor here, a small business person with no common law employees who was never told to file. Furthermore, he is voluntarily bringing the matter to the DOL's attention. My success rate with waiver of penalities has been excellent in the past. Even if the letter was not persuasive, I can't imagine the DOL's penality would exceed the DFVC' filing fee of $15,000.

Has anyone had recent experience with the DOL regarding late filing? Am I being overly optimistic? Any thought would be appreciated. Thanks.

[mbozek]

where did u come up with 15k? I thought the max penalty if all 5500 are submitted at the same time is 1500.

[Guest Thornton]

I was reading the $1,500 per plan as $1,500 per 5500 x 10 years. Is the maximum $1,500, regardless of the number of delinquent returns filed. If so, I will change my opinion and recommend filing under DFVC. Thanks.

[Guest Thornton]

Thanks. It's clearly worth $1,500 to have the problem behind you!

[jpod]

Three comments:

1. DFVC is not available for an "owner-only" plan because it is not subject to any ERISA Title I filing requirements, and, therefore, is not subject to any Title I late-filing penalties.

2. I believe the IRS has said that if a plan is not eligible for DFVC, the IRS' automatic waiver of Internal Revenue Code penalties DOES NOT APPLY. Therefore, you are at risk for Internal Revenue Code penalties which I believe are $25 per day for each day late up to $15,000 per 5500, unless you can show "reasonable cause."

3. Nevertheless, you have a legal obligation to file, and you still file at the regular DOL address. When you do, include a statement of reasonable cause explaining that you are a "FIRST TIME FILER" and just found out about the filing requirement. And, hope for the best.

[Lynn Campbell]

Does anyone have recent experience with late 5500-EZ filings and the IRS response to your "reasonable cause" letter? It would be very helpful to hear from you! Thanks.

[bdeancpa]

I have some very recent experience in this area. A local sole proprietor recently contacted us with a story similar to your new clients, where he had just learned he should be filing a 5500-EZ. After discussing the matter with us and getting a fee quote, he opted to prepare the forms himself. He had both a MPPP and a PSP. The first year plan assets exceeded $100,000 was 1998. He file both returns for 1998 and hadn't put the information together for later returns yet. A few months after filing he received two letters, one for each plan, assessing a $15,000 penalty for each plan.

Then he became a client

We wrote a letter to the IRS saying basically he wasn't aware of his filing responsibility and once he became aware he filed the returns. We also indicated he was in the process of accumulating the information to complete the remaining delinquent returns and bring all filings up to date. Based on that we asked the IRS to abate the penalties. They responded in a couple of weeks and abated all penalties.

[Kirk Maldonado]

My experience has been that the IRS is very accomdating if you voluntarily approach them on a missed filing and offer some type of plausible explanation.

However, if they catch you, then they aren't quite so accomodating.

[mbozek]

My experience has been in dealing with the IRS that penalty will be abated even after being contacted by them if a response is prepared by counsel giving a reasonable explanation for the failure to file the 5500 or other tax returns. It also helps if it is a first time failure or a one time omission.

[Guest Judy D]

I just got a call from a 5500-EZ non-filer. She isn't sure she still has records showing when the assets crossed the $100,000 threshhold, but she believes it was before 1996. I want to advise her how many years' EZs she needs to file. Any suggestions?

[david rigby]

Good faith? Pick a date?

[Lynn Campbell]

in order to file she will need to find the asset info back to the first filing - so I would suggest she do her best to get records back to the $100,000 threshhold and file for that year and every one after that. The investment institutions should be able to help if necessary...good luck!

[Guest Gregory]

Prepare your client to write a check.

My experience in Feb 2004 involved 8 years of missed EZ filings. ERISA attorney filed forms with "tear-stained" letter. Result...IRS cut in half the $15,000 per plan year and sent a bill for $60,000 ($7,500 x 8).

Attorney refiled under DFVC only to be told it doesn't apply to EZ filings. Customer ended up writing the check just last week.

Sad part is client was too damn cheap to pay us to prepare the filing. Turned us down in writing when we offered it for $80 a year when we originally signed him up on our prototype.

Have seen complete waiver if missed for the first time or missed a year due to change in TPA after successfully filing for several years.

[bzorc]

In 17 years of doing this, I have never had a late Form 5500-EZ filing rejected by the IRS. I have also taken over one-person plans who had the $15,000 bill in front of them and got that abated with the "tear-stained letter". Seeing Gregory's post is somewhat scary though...

In any event, the one lesson learned over the years is if you have a mass filing of 5500-EZ's, do them all at the same time. I looked at a case where another TPA had a client file each year separately with the "tear-stained letter", going back to 1996. Client got 6 $15,000 bills for late filing, an the other TPA had to abate each year individually. Unless you need the billing dollars, the mass filing is the way to go!

[SoCalActuary]

We have had a mixed lot on these 5500-EZ late filings.

Early after the DFVC program, we were getting favorable IRS responses, but not now.

We have one still pending that matches your facts well. Once we filed the seven back forms, we got separate IRS letters on the $15,000 penalty for four of the years. We have now appealed for a waiver. Stay tuned for further developments on this.

[K-t-F]

Ironically I received a call from a client that left in '99 and now tells me he hasn't filed since. He has a July year end so now we are looking at '00, '01, '02, and '03. Is what I am reading, the way to tackle this is to file all 4 years at once with the infamous "TSL" (Tear-Stained Letter), not file them individually?

[Guest FormsRmylife]

Given that you previously filed for this client, the TSL is less likely to work. After all, there is some evidence that the client was aware of the requirement and made no arrangements to meet it. I would not encourage the client to hope over much.

[Lynn Campbell]

maybe you do not want this client back?

[K-t-F]

Huh... (long pause).... Unfortunately the client (as many of them are) was oblivious to what was required. Ignorance is no excuse, but clients like this one rely so heavily on the CPA or attorny to guide them they assume all is well when nothing is said... the "no news is good news" scenario. Sheesh... what a spot.

So what most are saying is that the TSL works for a new plan that has not filed ever, but in the case where a client is lost in a shuffle he is screwed? (can I say that here?)

Anyone know a good agent I can send this to their attention?

[jquazza]

Out of curiosity, how many of these late filers were DRs?

[Guest Judy D]

By DRs, do you mean doctors? Surprisingly, the non-filer I got a call from is not. She seems quite organized, and understands her obligation to file. She'd just relied on her CPA's advice for years -- who assured her there was nothing more for her to do with the plans except to timely deposit the contributions he calculated each year, which she did -- until the CPA called her to confess that he'd failed to mention the 5500-EZ filings. She's a little freaked out by the potential $15,000 penalties. I'm still waiting to hear back from her whether she wants our help (and to pay our fees for) getting this cleared-up. I think she's a good candidate for the TSL approach.

[K-t-F]

Mine is not a Doc either... rather a local media personality. He was ill with a serious disease and faded away for a few years. His Personal Corporation was disolved but the plan still remains. No contributions since 2000 I think... maybe earlier. I have yet to talk to the CPA to find out more info.

[Guest Guest_named_Roger_*]

My client recently discovered that they had been reading the $100,000 threshold rule wrong and now realized they should have been filing form 5500-EZ since inception. With 5 years of missing 5500-EZs he is very nervous about the potential for penalties. We have heard that the IRS is taking a very hard line and wondered what the experience of others has been recently.

[Pension Panda]

We just had a client with this problem last month, although the failure to file was for one year not five. We called the IRS and asked if we should mail the two years of 5500-EZ filings and then wait for the late notice from DOL or submit something with the 2005 filing. He recommended submitting a letter of explanation with the initial filing (the client had less than $100k in actual assets at the end of the year but his 2005 accrued contribution put him over the $100k limit). He suggested we hold onto the explanation letter if/when the DOL sent out a late notice.

We told the client to write an explanation letter and submit with the filings.

[Bird]

the client had less than $100k in actual assets at the end of the year but his 2005 accrued contribution put him over the $100k limit

FWIW I think you could determine that on a cash filing basis a return is not required.

[Guest Drtony]

I have a situation in which I need some professional help with filing Form 5500 EZ. My accountant advised me Incorrectly. Same CPA for over 12 years who helped me start by S corp. Needless to say he has not been a help since I called the IRS and found out about my obligations. He has gooten too big to be bothered with my account. Bad situation. reluctant to terminate his services without a good follow up. Read the material contained on line here and forwarded letters to EBSA along with letter for each form going back to 2002 but may have completed them incorrectly. EBSA received them but the IRS does not show them?? Need qualified help in the Hoboken NJ or new york city area . Anyone recommend some one thanks.