Sanction Amount For Audit Cap

[mming]

Plan was requesting a favorable determination letter from the IRS when they discovered that the CRA amendment from last year was adopted two weeks late. It was forwarded to audit cap for a document failure where they issued a letter stating the sanction to be a non-negotiable amount of $3,000. This was after it was explained to them in writing that the late amendment had absolutely no operational impact on any participant (this a basic profit sharing plan - no transportation fringe bfts.), the total trust assets are only $20,000 and it was amended only 2 weeks late.

Rev. Proc. 2003-44 states that the sanction for audit cap is a negotiated percentage of the Maximum Permissable Amount ( MPA seemingly defined as the amount charged if they were to throw the book at you). Also, "Sanctions will not be excessive and will bear a reasonable relationship to the nature, extent, and severity of the failures."

Have any of you had any similar experiences? We are the tpa and are taking responsibility for the oversight but we hope there is a way to reduce the amount. The assessment of a non-negotiable sanction of $3,000 on such a small trust for such a minor infraction seems excessive. Is there anything that can be done?

Thanks in advance.

[KJohnson]

It used to be that one of the factors that was considered is the fee that you would have had to pay under VCP (which for your plan would could have been as low as $375 provided it was submitted to VCP within one year after the CRA amendments should have been adopted). Unfortunately, the IRS got rid of this factor in 2003-44.

I am not sure about the IRS' position that the amount is non-negotiable--by its vary nautre and as stated in the Rev. Proc. the sanction amount is a negotiated amount. I would think that the IRS would be willing to listen to arguments for a reducition in the amount based on the factors listed in 2003-44:

02 Factors considered. Factors include: (1) the steps taken by the Plan Sponsor to ensure that the plan had no failures, (2) the steps taken to identify failures that may have occurred, (3) the extent to which correction had progressed before the examination was initiated, including full correction, (4) the number and type of employees affected by the failure, (5) the number of nonhighly compensated employees who would be adversely affected if the plan were not treated as qualified or as satisfying the requirements of § 403(b), § 408(k) or § 408(p), (6) whether the failure is a failure to satisfy the requirements of § 401(a)(4), § 401(a)(26), or § 410(b), either directly or through § 403(b)(12), (7) the period over which the failure(s) occurred (for example, the time that has elapsed since the end of the applicable remedial amendment period under § 401(b) for a Plan Document Failure), and (8) the reason for the failure(s) (for example, data errors such as errors in transcription of data, the transposition of numbers, or minor arithmetic errors). Factors relating only to Qualified Plans also include: (1) whether the plan is the subject of a Favorable Letter, (2) whether the plan has both Operational and other failures, (3) the extent to which the plan has accepted Transferred Assets, and the extent to which the failure(s) relate to Transferred Assets and occurred before the transfer, and (4) whether the failure(s) were discovered during the determination letter process. Additional factors relating only to 403(b) Plans include: (1) whether the plan has a combination of Operational, Demographic, or Employer Eligibility Failures, (2) the extent to which the failure relates to Excess Amounts, and (3) whether the failure is solely an Employer Eligibility Failure.

[traveler]

mming, I'm wondering, did the IRS stick to the $3,000 sanction amount, or were you able to negotiate it down?

[mming]

Although we had many, many conversations and approached them from many different sides, the end result was a $500 reduction. Their "reasoning" was that the MPA would be way over $3K considering the tax liability created by the plan losing its qualified status and the sponsor losing the deductions for contributions, paying taxes on investment earnings, etc., even in this tiny plan. True, but they still showed a lack of perspective. BTW, we were told that $3K is a default amount in most cases.

Better than nothing I suppose. And, of course, they said at the end that the main reason for the inflexibility was that the IRS is in a big yank to generate revenue, more than they normally are. Lame.

Are you working on one of these currently?