What is an "open" tax year ?

[Guest hyper]

Fee, taxes, etc. for being nabbed in audit CAP are assessed based on "open" tax years.

My understanding is an "open" year is generally the past 3 years but - When is a year considered "open" ? What starts the clock ticking to "close" a particular year ? A few cites would be most appreciated.

I never had to pin it down before. Thanks all.

[WDIK]

What starts the clock ticking to "close" a particular year ?

The Schedule P instructions indicate the following:

The statute of limitations under section 6501(a) for any trust described in section 401(a), which is exempt from tax under section 501(a), will not start to run until you file this schedule.

You can view Section 6501(a) here.

[Bird]

It's generally understood that filing the Sch P starts the running of the statute of limitations for a plan. However, I've wondered before (and I'll repeat it here) whether filing the plan return (with a P) really is significant in protecting deductible contributions, or whether the business return on which the deductions were taken is the significant filing for most issues.

By implication, if you don't file the P, all years are open. I'd be curious to hear if anyone has had more than 3 years open because of an unfiled P.

(I honestly don't know and I'm just thinking out loud.)

[E as in ERISA]

I believe this is how it works: Tax year ends 12/31/00. Return filed 9/15/01. 3-year statute of limitations starts running. On 7/16/04, the IRS comes in and starts auditing. They find a few things that would allow them to disqualify the plan or assess taxes and penalties. They say that you have two choices. You can sign an extension of the statute (whoever signed the Sch P does that) and they will continue to negotiate with you and enter into a closing agreement with less drastic results. If you don't sign, then they will just apply worst case scenario and you can appeal it up the line. So an extension gets signed and maybe another and another. In the meantime, they're looking at records further back than 2000, because those are relevant for 2000 tax year and beyond. For example, they might need PY NHCE ADP or HCE determinations, etc. So in 2005 or 2006, they have records going back to 1999 or before.

For most plans, they probably get past the three years without the audit beginning. So then those years close.

But it works the same way on the corporate side. And most large corporations have auditors in every year. They even have their own offices. They always have several years open. So if there is an issue, it may be more likely that the corporation has "open years." (Although it's not necessarily an expert looking at all the plan details, so the issues wouldn't be as significant).

[mbozek]

I dont think the IRS has authority to audit a closed yr after the s/l for auditing a return has expired. E.g., a taxpayer can agree to an extension of an open yr before the s/l for auditing that yr has expired, but the IRS has no authority to extend the s/l for auditing a return after the s/l has expired. Also there is a separate s/l for the plan sponsor's tax return if the IRS disallows the deduction taken for contributions.

[Dan]

I think mbozek is correct, generally, with the following exception. If the plan uses data for a Prior Year ADP test in a year that is open to audit, then they can reach back into that prior year and audit it as well. This has been one of the arguments for using current year testing.

[E as in ERISA]

I'm just making you aware that this does happen. And during the "negotiation" process with the IRS, the client may have to decide how cooperative they do or don't want to be on requests that seem overreaching. I think that there was one time when a client agreed to do five years of HCE corrective distributions instead of doing three years of QNECs in order to correct an ADP test that turned out to be failed (because a large segment of the population had not been counted in the test). I was not involved in that but did see that it had happened...and that was the client's explanation.

[Guest Harry O]

The IRS can't assess tax for a closed year but they can request information relating to an event that occurred in a closed year that impacts taxes in an open year. For example, if taxpayer took an improper deduction in a closed year that generated an NOL that is being used to reduce taxes in an open year, the IRS can "audit" the closed year and disallow the deduction. Taxes in the closed year are not impacted, but the NOL is reduced for the current year and taxes increased.

The IRS has a similar viewpoint on qualified plans. If you violated the section 415 limits in a closed year, the IRS takes the position that your plan is disqualified until the error is corrected. They can't assess tax for any years that are closed, but they can assess tax in open years even if you perfectly complied with the qualification rules in those open years.