May a practitioner allow an employer to ignore an employer’s past failure to administer a retirement plan according to the plan’s terms?

[Peter Gulia]

Hypothetical: Although furnished by a recordkeeper, a retirement plan’s document isn’t a prototype or volume-submitter document; it’s an “individually-designed” document. The plan changes to a new recordkeeper, which is unwilling to restate the plan’s document. The employer engages a lawyer to restate the retirement plan. The lawyer discovers that the employer never operated the plan according to the plan’s terms, and never tried to do so. The failures were operating the plan according to unwritten provisions that could have been consistent with the Internal Revenue Code and ERISA had the provisions been stated by, or at least not contrary to, the plan’s document. The lawyer tells the employer about opportunities to correct the plan’s tax disqualification, but the employer tells the lawyer that it won’t pursue correction and won’t amend or disaffirm any of the many writings that describe the plan as a tax-qualified plan. Instead, the employer’s chief executive and 100% shareholder instructs the lawyer to do only the task she was engaged for: restate the plan for proper and accurate provisions for the future.

Assuming that the lawyer will not submit an application for an IRS determination, is there any professional-conduct rule that would preclude the lawyer, with her client’s informed consent, from limiting the scope of the lawyer’s work to a drafting job that deliberately sets asides all other issues?

In the absence of an application for an IRS determination, is the drafting job “practice before the Internal Revenue Service” within the meaning of Circular 230?

How might our thinking about professional conduct change if the lawyer is the employer’s representative to present an application for a determination letter?

If the Form 5300 truthfully answers every question, does the practitioner have any duty to tell the IRS that the plan wasn’t tax-qualified in the past?

[rcline46]

I think the lawyer did their job by identifying the past problems (in writing I hope). THe lawyer should get it in writing that the client acknowledges the failures but does not intend to correct. I dont see the lawyer in the facts given being a fiduciary.

If the lawyer was not asked to review the operation of the plan, but did so out of due diligence Kudos to the lawyer.

After that, drafting a document according the the specifications given is a separate task. If not submitting for a determination letter, I don't see 'practice before the IRS' issues. Other than drafting failures, I don't see any exposure. I don't know the TPA did use a pre-approved document in the first place.

[Peter Gulia]

rcline46, thanks for your nice help. How about the last question; if the lawyer is the employer's representative to ask for an determination, does any IRS rule require the practitioner to disclose to the IRS that the plan wasn't qualified in operation?

[Guest Sieve]

Peter --

I know of no IRS rule requiring a representative of an adopting employer to affirmatively and preemptively inform the Service of an operational violation of a qualification requirement. However, those who submit a plan for a determination letter would be practicing before the IRS, and could be sanctioned under the following circumstances (among others):

• "Giving false or misleading information, or participating in any way in the giving of false or misleading information to the Department of the Treasury or any officer or employee thereof . . . in connection with any matter pending or likely to be pending before them, knowing the information to be false or misleading." (Circular 230, Section 1051(a)(4).)
  
• "Willfully assisting, counseling, encouraging a client or prospective client in violating, or suggesting to a client or prospective client to violate any Federal tax law, or knowingly counseling or suggesting to a client or prospective client an illegal plan to evade Federal taxes or payment thereof." (Circular 230, Section 1051(a)(7).)
  

Moreover, there are some concerns I would have if that representative is governed by federal securities (or other) rules or state Code of Professional Responsibility/Conduct rules (if the representative is a lawyer). In Michigan, for example, there are a number of ethical standards that I would be concerned with as a lawyer, such as:

• "A lawyer shall not counsel a client to engage, or assist a client, in conduct that the lawyer knows is illegal or fraudulent . . ." (Rule 1.2©.)
  
• "In the course of representing a client, a lawyer shall not knowingly make a false statement of material fact or law to a third person." (Rule 4.1.)
  
• "It is professional misconduct for a lawyer to: (a) violate or attempt to violate the Rules of Professional Conduct . . .; (b) engage in conduct involving dishonesty, fraud, deceit, misrepresentation . . . where such conduct reflects adversely on the lawyer's honesty, trustworthiness, or fitness as a lawyer . . ." (no wiseacre comments on this one, please!! . . .) (Rule 8.4.)
  

If I were the client, on the other hand, there are some concerns I would have, and I would not be so cavalier about them:

• Having signed tax returns, under penalty of perjury, which lists deductions for contributions to a qualified plan, knowing that the deduction is not permitted if the plan is not qualified and knowing that the Plan has not been operated substantially in accordance with its terms; and
  
• Having signed Forms 5500, under penalty of perjury, when code 3C is NOT entered in Line 8a--which means, by absence of that code, that the plan is intended to be tax-qualified--while knowing that the plan is not being operated in a tax-qualified manner.
  

That being said, I don't think that making a request for a favorable determination letter is a violation of any of these rules by a representative of the employer, since there probably is no knowing transmission of inaccurate or misleading information, and certainly there is not necessarily any counseling to evade any rules (especially where the qualification issues arose on someone else's watch). Informing the client that the attorney/representative will not participate in any future shenanigans (technical term!) goes a long way in disassociating that attorney/representative from past acts. Yes, the plan remains disqualified in operation until past sins are corrected, but the favorable determination letter request is not a request for a ruling that operational errors have not occurred, but only a request for a ruling that the plan, on its face, meets the necessary language requirements that, if followed, will result in operational qualification.

[rcline46]

I agree with Sieve.

[Peter Gulia]

Thanks for the help!

[mbozek]

Clients can chose to limit the scope of the retention of counsel. There was recent case where the NY court appeals court held that a lawyer who was retained by a client for the purpose of filing a tax appeal under a specific tax law provision which was unsuccessful, was not liable in malpractice for not considering or researching an alternative theory of recovery involving another tax law provision which would have been successful on appeal because he was not retained by the client to pursue the alternative theory. Clients can choose to ignore past violations which have been discovered and take audit risk as welll as disregard advice of counsel to correct the past violations.

I dont see how the IRS rules could require counsel to reveal any past violations counsel is aware of which are not part of the submission for which counsel has been retained, e.g submission of plan for determination letter based on amendments to plan because it would violate attorney-client privledge. As I recollect IRS determination letters are limited to form of the plan and not to operation of the plan which can always be reviewed separately.

As for the client's risk in signing tax returns I dont see how any tax law violation could be proved because the client could always claim ignorance or that it was going to remediate the operational glitches in the plan and/or that the violations were not substantial.