Negotiation with the IRS

[Guest flogger]

I'm looking for feedback from those of you that have negotiated with the IRS regarding penalties/excise taxes/etc. that arose from an audit of DB plans. The IRS is giving the client an initial sanction of $45,000 and I'm trying to get it to $0 (of course). If you have any experience in dealing the IRS attitiude, especially in So Calif., I would like to hear what you learned.

Here's the barebones of what's going on with my client. The DB Plan FSA omitted quarterly contributions and interest thereon on the Sch B (for 02). The local IRS actuary has done his calcs on what it should have been, what the excise tax should be, and wants to collect $45K from the client.

The Plan has since been terminated and all participants were distributed their benefits, 100% vested of course, and no waivers of any kind. The termination was audited and passed with no change. My opinion is that this is a "no harm no foul" situation. Any monies desired by the IRS are rationalized by technicalities (isn't all of our work?) and are unreasonable.

Discussion anyone?

[Guest dsyrett]

I assume that the $45K arose from the 10% excise tax due to a funding deficiency. Is there also a 100% followup excise tax in there?

It has been my experience that it is very difficult to get the 10% part waived but not as difficult to get the 100% portion waived.

[david rigby]

Let's say it is almost impossible to get the 10% waived, since it is statutory. Exceptions would be from disaster relief (such as 9/11).

However, more generally, getting the IRS to modify its sanction may depend on why the penalty is being imposed in the first place. More analysis would be needed.

[mbozek]

In case you havent noticed the IRS's middle name is revenue. The only way to negotiate a tax assessed by an agent is to have a legal argument as to why the tax does not apply. I dont think no harm no foul is a legal argument against assessment of the tax.

[Kirk Maldonado]

I agree with MBozek.

Raising frivolous arguments with the IRS will not only not help, but could hurt. You need to retain somebody who is knowledgeable and skilled at these matters. That person should be somebody who can and will objectively evaluate whether there are any legitimate arguments to be made and will advise the client whether it even makes any sense to fight the IRS.

Anybody who will fight the IRS on every single case is only looking to increase his or her income; not serve the best interests of the client.

[Guest Harry O]

I would dissent slightly from the previous two posts. My opinion is that it all depends on the facts <g>. If this is one of a number of issues you are negotiating with the IRS about, you should not hesitate to bring up the no harm - no foul argument. For better or worse, IRS audits (especially at the corporate level) are an ongoing series of negotiations where the IRS will frequently be willing to horsetrade to close down an audit. They may give you this or enter into a closing agreement for a percentage of the tax even if there is no technical legal argument in your favor.

If this is the only issue you are fighting about, it will be a little harder to move the IRS off the ball. If you get to the appeals officer he may drop 20% of the claim just to make the issue go away just to close the audit and to avoid having to spend time and money litigating (especially in light of the fact that the plan is now terminated and everyone was paid in full - this fact may cause the IRS to hesitate litigating what would otherwise be an open and shut case). Of course, that is $9,000 under your facts. You have to ask yourself whether it will cost your client more than $9,000 in legal and actuarial fees to get to that point. Your client should also be advised that there is no guarantee the IRS will write off anything at appeals. This means they will have paid their lawyers and actuaries for nothing.

[Guest flogger]

The excise tax is what is being accessed--so it appears. At this stage of the audit, the examiner has only given me their actuary's "notes". It seems like I'm buying a car--as they are waiting for my offer. There is no outright "We want $X from you and we will go away."

There are no other current IRS issues with this client--but I will admit that I am the one who overlooked the quarterlies for the year in audit. So my a** is somewhat on the line.

I have gone over the IRS actuary notes and do find some mistakes (do you think they do this on purpose?) in the calculation of the penalties. But again, there is no offer from the IRS yet. I want to make a closing agreement offer of $0, but only if it's prudent (keeping the final bottom line in perspective).

Thanks for the exchange of thoughts. Keep 'em coming.

[david rigby]

If this includes the 10% excise tax on a funding deficiency, it will not go away. If the 100% excise tax is also included, it might go away if you can present the reasons why it happened (and reasons why it won't happen again because your procedures have been improved). If they are assessing other penalties, there might be some room for negotiation.

You might also look thru the IRS records of various disaster relief to see if any might apply.

[lbell]

There is a program i have used that is a Fiduciary audit arrangment that can be implemented that has had a good trackrecord with IRS and DOL for mitigating damages. you may be interested in following up with suggesting the program as an ongoing tool that would both wave the damages and assure that there were no reoccurrences. There is an E/O carrier behind the audit that would pick up the downside risk.This is a permissible cost of the plan.

[Kirk Maldonado]

lbell:

You are saying that the plan can pay the cost of the E&O coverage?

[mbozek]

The IRS is not waiting for your offer. After the examination is completed and reviewed by a supervisor your client will get a notice from the IRS demanding payment of the excise taxes for the failure to make the required contributions. The notice will provide a right to object to the tax imposed- but this will require the assistance of a tax advisor for which the client will pay by the hour. If the reasons have no merit the IRS will deny the objection and enforce the collection of the tax unless the client wishes to file an appeal. But while the appeal is pending interest is accruing on the tax. Yes the client can apply for an offer to compromise the claim if there is doubt about the liability of the claim, doubt as to collectibility, economic hardship or promotion of effective tax administration which is permitted under form 656. But there needs to be substantial justification in order to comprimise a claim for promoting effective tax adminsitration- see Form 433B.