Form 5330 Excise Penalty Tax

[Below Ground]

Rev. Rul. 2006-38 explains how the "first tier penalty tax" is computed and provides an example. It then says that the revenue ruling only applies to the first tier tax. While it does have some explanation of the second tier tax, I am not understanding the "when and how" of the second tier. Could someone explan when the second tier applies, and how much it is, using the example in Rev. Rul. 2006-38? Thanks!

[austin3515]

From the 5330 instructions (Rev 10/04):

The second tier tax is a 100% tax that is applied "if the initial "tax" is not corrected within the taxable period." I think the use of the word "tax" is sort of a typo as the surrounding text clearly related to correcting the PT--not sure how to "correct a tax"?

The trick here is the definition of taxable period, which is the earliest of:

a) The date correction is completed (sort of hard to miss this one)

b) The date of a mailing of a notice of deficiency

c) The date on which the tax under 4975(a) is "assessed"

In my opinion, this could be interpreted loosely as follows: You only need to pay the 2nd tier tax if the DOL is the one that catches you. My recollection from DOL seminars is that in reality the 100% tax is almost never imposed - rather it is a big stick that the DOL can wield as a negotiation tactic.

One thing is for sure, I have NEVER heard the DOL/IRS discuss this 2nd tier tax as it relates to late deposits, and I think the above is the reason why. It is important to note that the example (which is a fairly typical situation involving prior years) does not include the 100% tax.

[Below Ground]

Beautiful! I really appreciate that clear and comprehensive reply. You hit the problem right on the nail head -- the meaning of "tax period". Thanks!

[Belgarath]

Additionally, for avoiding the second tier tax, I believe the tax is abated if the correction is made within the 90 day period commencing on the date that the IRS issues a notice of deficiency for the tax. See IRC 4961 and IRC 4963(e).