Help! Audit CAP Counsel Needed

[Guest silverwolfson]

We have a case that is about to be bounced from Audit CAP on account of a position taken by the Service that is draconian. Please read over this fact summary and email us if you have ever negotiated a more favorable settlement in a case like this in either Audit CAP or VCP. We are trying to get a handle on whether cases like this can ever be processed reasonably. No names needed of course, but if you have a similar case that was settled more reasonably, please provide as much details as possible including the Service Rep who worked the case. Please email as soon as possible - we need ammunition.

Facts: Mid size company with 200 blue collar employees maintains a 401(k) plan with a match. Almost 20 years ago, the Company began providing small cash bonuses to NHCEs ($50 every two weeks) for meeting target goals. This "beer and pizza money" was of course not subject to deferrals. The problem is that the plan was a prototype plan and the definition of compensation did not exclude these bonuses. The compensation definition also inadvertently included some car allowances for several of the HCEs. The IRS audits the plan and determines that there should be deferrals on the bonus and car allowance money and wants the company to go back 20 years to make a qualified nonelective contribution in the amount that should have been deferred, plus the match, plus earnings for all years. Even though the bonus amounts are relatively small, when you go back that far and make the deferral, match and interest payment, the sum is over $100,000.

We have offered to either make the match (and interest) only, or to permit the employees to make the back deferrals and provide the match and interest to those who choose to defer. We do not want to make the back deferrals because it gives a windfall to the employees which doesn't seem right and will at a minimum cause the company to terminate the plan and at could cause them to go into bankruptcy. We can provide affidavits that none of the employees intended to defer on their bonuses, but the IRS is stuck on this correction method.

[jpod]

I don't have any of the information you requested, but if all else fails I would (a) contact your client's Congressman and/or its Senator and request assistance, and (b) ask the client to permit you to advise the IRS that the employer is more than willing to allow the plan to be disqualified rather than to spend anything close to the amount of money it would take to do what the IRS is proposing.

[401_4_ever]

Have you tried asking for 1/2 of the Plan's ADP rate for the effected years plus applicable match to avoid the windfall scenario?