Advice needed, IRS Audit CAP

[Guest jc1457]

We have a Safe Harbor New Comparability 401(k) Plan that was recently audited by the IRS. Upon completion of the audit, the only problem found (and they looked at a lot!) was that the 2005 Interim Amendments was signed late. The amendment was signed on 10/16/2006 and there was no extension to file the 2005 corporate tax return - so the amendment was signed roughly 7 months late.

In September 2005, the human resources manager from the company had retired and a new employee was hired. This new H/R manager was not aware of the deadline to have the amendment signed. We included the deadline date in our cover letter - but clearly, our office should have followed up and so, the error falls on both of us.

I handled the audit as far as I am qualified and feel that negotiating with the IRS is out of my area of expertise. A senior member of our Firm will handle this from here on out.

Is there any advice anyone can offer? I am concerned because although this seems like a minor error, the fee listed under Rev Proc 2008-50 Correction on Audit is listed as $7,500 for a plan with 71 participants. The IRS agent told me to expect the sanction to be double this amount - so $15,000. This seems so severe for a plan that is being run so well. So many things where checked and not one other problem was found.

Any advice would be appreciated. Like I said - I am passing the next phase of this on to someone with more experience dealing with IRS negotiations but would like to offer some pointers.

Thank you!

[Guest Sieve]

I have found the IRS unmoveable when it comes to execution dates of amendments. I even had an agent tell me that an AA amendment indicating that the employer no longer was a member of a controlled group--not even a plan provision, but just a statement of fact--was executed late!

If you can show that the employer is in severe financial difficulty--by reference to tax returns, bank work-out letters, etc.--then the CAP coordinator can reduce the penalty significantly. That has worked for me (one client got a reduction of more than 80%). Other than that, all you can do, in my experience, is plead your case and try to get it kicked up to someone with discretion (i.e., speak directly with the CAP coordinator for your case)--but I'd be surprised if that works.

Good luck!

[Guest jc1457]

Thanks for your help. I appreciate your input.

I agree that there is a problem and that there should be a penalty. It just does not seem like the punishment fits the crime here. The client is not experiencing financial difficulty so we'll see what happens.

Thanks again.

[Guest Sieve]

I agree with you, and have had that discussion (re: large penalty for minor amendments) with an agent. He actually agreeed with me, but then told me he had no discretion but to impose the penalty. That's why you need to talk to someone with some level of discretion to get it resolved.

[Guest jc1457]

I agree with you, and have had that discussion (re: large penalty for minor amendments) with an agent. He actually agreeed with me, but then told me he had no discretion but to impose the penalty. That's why you need to talk to someone with some level of discretion to get it resolved.

Hi,

I had a similar conversation with our agent. HE told me the exact same - that he regretted it but that it was really out of his hands.

Thanks for all your advice. I will post on the outcome once it is determined.

Thanks again!

[Guest Sieve]

My agent actually bent over backwards to assist with my "late" amendment by deciding, on his own, that the typed date on the amendment was proper, even though the year had been crossed out and a later year had been written in!! I guess he must really have wanted to get rid of me!! (Mine was an FDL application, so my proposed penalty, while large, wasn't nearly what you are facing.)

One final option for you might be to refuse to make the change or to pay the penalty, and then to go through the IRS' administrative process until you get to a hearing officer who might be willing to reduce the penalty in the interest of settling the matter & closing the audit. I would absoluetly NOT recommend that course of action, however, without speaking to a lawyer whose practice involves tax litigation matters, since it is probable that a hearing officer would not reduce the penalty since there really are no factual or legal controversies here. Besides, any such potential cure might cost half (or more) of what the penalty might be!!