Prohibited Transaction - Interplay of Tier One Tax and Tier 2 Tax

[Guest Edward McElroy]

Suppose a prohibited transaction occurred in 2000 and the amount involved was $500,000. The PT was never corrected before it was discovered by the IRS on audit. The PT involved a sale of an LLC interest. It doesn't appear that it would matter if FMV was paid or not ... a PT occurred. Does the 15% first tier tax apply for each year beginning in 2000 (let's assume PT occurred on 1/1/2000) and ending in 2005 (let's assume IRS discovered PT on 12/31/2005)? Additionally, is the 100% second tier tax an ADDITIONAL tax that could be assessed? This could result in a tax of 175% of the amount involved. Any help would be appreciated. Thanks. Ed

[Belgarath]

First, for the 15% "first tier" tax, yes, it is 15% for each year.

The second tier tax is an additional tax. The second tier tax is abated if correction is made within the 90 day period commencing on the date the IRS issues a notice of deficiency for the tax. See IRC 4961.

I don't know if the IRS can or will negotiate a settlement on the first tier tax. For the amount of money involved, I'd strongly recommend experienced ERISA counsel. It appears to me, on a cursory reading, that it is sometimes possible to get the first tier tax abated (see IRC 4962 and 4963) but again, I'd check with ERISA counsel. Good luck.

[saabraa]

As far as I know, the IRS cannot abate the tier I tax but the DOL has final say regarding prohibited transactions, so try chatting with them or looking at their web site.

It's possible there's a partial break regarding the years ending 12/31/2000 and 12/31/2001. IF the 5500's were filed timely and were sufficient in reporting any line items related to the P.T., the statute of limitations is three years and is expired for those two years. You're still left with the pyramiding of the tax until the pt's corrected, in regard to post 2001 plan years.

[Guest Pensions in Paradise]

saabraa - correct me if I'm wrong, but I don't believe the 5500 starts the statute of limitations for PT's. Its the filing of Form 5330.

[saabraa]

I'm sticking with my original statement; the filing or deemed filing starts the statute. If any line items are pertinent and are NOT accurately answered, the statute is 6 years. The 5330's filing begins the SOL for other issues, such as minimum funding.