Calculation of DFVC Late filing Penalty

[Guest PLHart]

A plan sponsor filed a 5500 (small plan) 28 days late on Feb 28, 2003 (due Jan 31). They have now received a late notice penalty letter from IRS for $700.

We are inclined to to file amended return and check off "filling under..DFVC program". This, according to Corbel, will negate the IRS penalty and subject the plan sponsor to the DOL $10 per day penalty up to $750 max.

However, to what date do we count as the late filing for calculation of the penalty? The date the 5500 was originally filed (Feb 28) or the date the amended return is filed?

[401 Chaos]

I have not had any direct experience in this situation but it seems you could argue that since you could have filed under the DFVC program on February 28 and paid the applicable DFVC penalty at that time that you should be able to file an amended return formally requesting DFVC status based on the February 28th date for penalty calculation purposes. Refusing to allow the use of the earlier filing date would essentially put the DOL in the position of saying they are indifferent between (or even look less favorably upon) having a plan file a slightly late return not formally requesting DFVC status and a Plan making no filing at all for a much longer period even though the later filing complies with all the DFVC formalities. I would think the DOL should prefer more timely filings and should administer their DFVC penalties accordingly. I am not sure the DOL will buy this but it seems it is worth putting the burden on them to justify using the longer period for penalty calculation purposes.

[WDIK]

If I understand correctly, a plan is not eligible for DFVC if the DOL notifies the administrator in writing of a failture to file timely. Does anyone think this will eventually be expanded to include notification from the IRS?

[Guest jashendo]

I'm not so sure that the penalty situation is an either/or situation, as Corbel apparently advised. That is, going with DFVC does not necessarily "negate the IRS penalty."

DFVC itself does not (and cannot) provide relief from the Code penalties; here, I assume you are talking about 6652(e) -- $25/day.

Instead, IRS Notice 2002-23 (which obviously was issued in connection with the current version of DFVC) provides the relief from Code penalties for DFVC filers, and says "Once the late filer satisfies the requirements of the DFVC program, including paying the reduced civil penalty under section 502©(2) of ERISA, the relief under this notice will apply." (emphasis mine). In other words, until you complete a full DFVC filing/payment, you remain subject to IRS penalties. Since the IRS assessed the 6652(e) penalty before the DFVC penalty was paid (even if the 2/28/03 filing were considered to be a satisfactory DFVC filing), the IRS penalty is valid.

Now, I am not suggesting that:

(1) DFVC filing is not a good idea anyway, since you are still on the hook for the ERISA penalty; and

(2) you can't request that the IRS waive its penalty, which it has the discretion -- but not the obligation -- to do.

Personally, I believe that the IRS would probably waive the penalty if asked after compliance with the DFVC procedures, but it's not automatic.