IRS Challenge of Self-Correction

[Guest gaham]

I have a client we helped self correct an operational failure -- enrolled participants on a quarterly instead of monthly basis - plan was amended and did not get picked up operationally. We put money into the plan in accordance with the IRS correction methodology. The amount was de minimus in comparison to total plan assets but it did affect quite a few participants for a number of years. Now in an audit situation, the examining agent is saying that we did everything right in his view and that the self-correction was appropriate but his manager believes that the failure was not "insignificant." Has anyone had any experience with the IRS challenging the issue of whether the failure was "insignificant"? If so, what was the ultimate outcome? Thanks in advance for any input.

[ETA Consulting LLC]

Gaham,

When working with the IRS, you're always going to get one of three types of umpires.

Umpire 1 will tell you: I'll call it as I see it.

Umpire 2 will tell you: I'll call it as it is.

Umpire 3 will tell you: It's nothing... until I call it.

You're possible dealing with Umpire 3 who'll quickly explain to you that when you bowl the ball across home plate (clearly hitting dirt before the reaching the batter), if he calls it a strike, then it's a strike.

It is a purely arbitrary situation. Unfortuately, there's like nothing anyone can advise that would help. All roads leads to engaging with that auditor and their supervisor. Be open, however, to the possibility that the supervisor already knows his desired outcome. You'll have to quickly find what that is and attempt to negotiate it down; keeping your arguments for why the defect was insignificant. Remember, significant failures doesn't automatically mean VCP, it merely prescribes a correction period (so that may be an angle to use).

Good Luck!

[jpod]

If you self-corrected in accordance with published guidelines, the manager is likely bluffing. Wait until they actually propose that you need to pay something per audit cap to get out of this. If they do propose something that is more than nominal, there are a couple of different ways to call their bluff. One way would be to immediately contact your Congressman and Senators and tell them what is going on, and also inform the local media what is going on, or at least threaten that this is what you will do if they don't back off. Another way is to tell them to go ahead and do what they have to do and you'll see them in the United States Tax Court.

[Kevin C]

Another option would be to request a Technical Advice Memorandum on the issue.

In the case we had with a similar problem, the agent would only give a very vague explanation of why she thought the failure was significant. She was also under pressure to close out this Form 5310 filing. We finally informed her we would request a TAM if the issue was not resolved satisfactorily and she backed down.

Good luck.