Compliance with DOL and IRS

[Guest Scott E. Hall]

We are consulting a company 401(k) plan whose last audit was performed by another CPA firm in 1995. The plan has been filing Form 5500s since, but has attached the audited statements of the 1995 year to each filing, and has not engaged an auditor for the years 1996 - 1998.

We have been engaged to audit the 1999 plan year, for which we will also audit 1998 in order to issue comparative statements, but 1996 and 1997 are still in question. We want to advise them on the potential penalties that may be imposed as well as provide them with any options they have under amnesty provisions to correct this. We are aware that there is a $1,100 a day penalty for failure to file Form 5500 with the DOL (including filings that exclude material information), but have not been able to locate any "come-clean" provisions.

Any information and/or suggestions regarding the best manner in which to advise this client are appreciated.

Scott E. Hall, MS/MBA, CPA

Vitale, Caturano and Company, P.C.

[Guest Rick Butler]

The DOL has a delinquent filer voluntary compliance program you might look into. The maximum penalty assessed is $5,000.00 for a 5500 over 12 months late. You may be able to even bargain down some.

[Guest RBeck]

Did the plan require an audit for 1996, 1997 and 1998? If the plan filed Form 5500 rather than 5500-C/R, were there any rejection notices from IRS for incomplete filings? If IRS has sent notices, your options with respect to amnesty may be more limited.

[Guest Scott E. Hall]

Thanks for your responses. The plan did require an audit for all years, including 1996 through 1998. Form 5500 (not Form 5500 C/R) was filed for these years. NO notices from either the DOL or the IRS have been received regarding these plan years.

Scott E. Hall, MS/MBA, CPA

Vitale, Caturano and Company, P.C.

[pjkoehler]

If the plan failed to file the required auditor's report for the 1996-1998 plan years, then the forms filed are considered incomplete, which the DOL regards as not filed for purposes of the plan administrator's exposure to the late filing penalty. It's unusual for the DOL not to catch such a failure within 2 plan years, unless the forms contained inaccurate responses which would been consistent with the failure to include the report. You'll want to check the Forms to make sure that all questions regarding the obligation to file the auditor's report were accurately completed. The DOL "delinquent filer voluntary compliance" program, procedures and reduced penalty structure, are set forth in a PWBA Notice published in 1995 in the federal register at 60 FR 20874.

[KIP KRAUS]

Scott:

I don't know what IRS office the plan has been filing with, but our Melville, NY IRS filling office picks up every minute detailed error. If a number is one digit off, they senned us a notice. I find it hard to believe that a plan could file with the same auditor reports and the IRS office review would not pick up such a glaring error. Maybe you can put some of the blame on them and lessen the penalty hit.

[Alonzo]

Is filing amended returns for the years in question out of the question? Usually, a 5500 filed without an accountant's report gets an IRS letter. If you respond within the IRS time frame (and supply the auditor's report), you do not get asessed a penalty.

In my experience, the one time DoL kicked back a return, because it did not have an auditor's report, they did not threaten to assess a penalty, as long as the report was supplied within the response time outlined in their letter.

Do others of you have different experiences?

------------------

[This message has been edited by Alonzo (edited 05-26-2000).]

[Guest RBeck]

Alonzo makes the point I was trying to get to. If NO notices have been received, take the proactive approach to the problem and amend the 1996, 1997, and 1998 returns. Don't wait for the IRS/DOL to come to your client with notices and penalties. I do find it hard to believe that the filings weren't kicked back, though. Like KIP, I've gotten filings kicked back for being $1 different, or one digit off. I suggest that you do the necessary audit work for 1996, 1997 and 1998, and file amended returns for those years.

[pjkoehler]

I don't think it's wise to characterize the filing of an amended return after the filing deadline as "proactive," in the sense that it reduces the employer's exposure to either the IRS or DOL late filing penalties, when the amendment corrects a substantial incompleteness of the return orginally filed, especially when the reason for the incompleteness was the failure to perform the required audit in the first place, which is itself an ERISA violation. The employer remains exposed to the IRS and DOL late filing penalty regimes. I guess if you subscribe to the "no harm no foul" basis for penalty abatement, you take some comfort in the fact that you've actually met the filing requirement, instead of playing audit roulette with the incomplete return. Nonetheless, the only way to reduce the employer's downside is by filing the amended returns under the DFVC program. Unless the employer does that, it is still playing audit roulette. However, by filing the amended returns late its giving the IRS and the DOL effective notice that its original return was substantially incomplete. (Not the best way to play roulette!)

[This message has been edited by PJK (edited 05-26-2000).]

[Alonzo]

PJK:

Have you ever had a client asessed a penalty because they failed to include the auditor's report with the 5500, if they later corrected the error?

In my experience, the IRS will tell you to file a 5500 without an auditor's report, if one is not available on the due date. I have not had a case where this has resulted in the IRS or DoL claiming the return was filed "late". If you will look in some old PLRs/TAMs/GCMs, you will find a published ruling invovlving an employer that filed a 5500-R, when a 5500-C should have been filed. IRS ended up ruling that no penalites should be assessed, even though most of us would consider such a filing "substantially incomplete".

With DVFC, you are talking a five figure amount to "resolve" the problem with DoL. You can argue there is an even larger liability for not filing. But if nobody can think of a time when the worst case scenario, or bad case scenarios have actually happened with this set of facts, then shouldn't the client be told of this record?

(I know the rules will soon be different, because I expect DoL will be tougher now that it has taken over the processing. But the years in question are still in the IRS' jurisdiction.)

------------------

[Guest RBeck]

In response to PJK, I've had IRS auditors characterize the filing of an amended return in the situation where I know the return to be incomplete as "proactive". If you know the return to be incomplete, it must be amended. If the IRS has not issued notices, the best thing to do is to amend the returns you know to be incomplete or inaccurate. This does not necessarily abate the possibilities of penalties, but it does go a long way toward minimizing the consequences. The delinquent filer program is great if you've got a plan that never filed. But, in my experience, the IRS has never rejected an incomplete filing by considering the plan not to have filed a return.

[This message has been edited by RBeck (edited 05-30-2000).]

[Kirk Maldonado]

I think that people need to distinguish between the IRS penalties and the DOL penalties.

In my experience, the IRS never assesses penalties if you file the return before they discover the deficiency (whetherh it is an incomplete return or a complete failure to file). I would even go so far as to describe them as lenient (in this regard).

On the other hand, if you want to have 100% protection from the DOL, you should use the DFVC program. However, I think that the likelihood of the DOL coming after you in those circumstances is truly minimal. In numerous situations where my clients have either filed an incomplete return or failed to file, the first notice that they got from the DOL in every single case said that if the employer corrects the deficiency within the alloted period (I believe it is 45 days from the date of the DOL letter), then no penalty would be assessed.

Thus, if the DOL doesn't assess a penalty if they actually catch you (provided the employer responds in a timely manner), then it is almost conceivable that they would go after you if you voluntarily initiate correction on your own. Nevertheless, you cannot completely rule out arbitrary action by the DOL.

By the way, my experience has not been that the government picks up minute mistakes on Form 5500. In fact, almost without exception, I've never heard of one of my clients being contacted except for gross mistakes in the Form 5500 (e.g., failing to attach the auditor's report). Even then, they don't get contacted for years after the filing.

[pjkoehler]

Alonzo, you may want to review the following admonition appearing on page 41 of the instructions to the 1999 Form 5500: "If the required accountant's report is not attached to the Form 5500, the filing is subject to rejection as incomplete and penalties may be assessed." While filing the amended return to cure the incompleteness may fix the number of days that apply for purposes of computing the potential DOL late filing penalty, it does not eliminate the exposure to the penalty.

One of my clients received the DOL Notice of Intent to Impose $50,000 penalty for the failure to include the accountant's report regarding a 5500 that had been timely filed. The DOL Notice was received within 18 months of the filing deadline. It was ultimately abated to the DFVC penalty of $5,000, after much negotiation and payment of attorney fees that probably exceeded the maximum penalty.

Also, you shouldn't draw much comfort from the IRS with respect to this issue. Remember, the 5500 is a multi-purpose form, i.e. an "annual/return report." The accountant's report requirement is strictly an ERISA Title I requirement. ERISA Sec. 103(a)(3)(A). 29 CFR 2520.103-1(B). It is not a Code requirement. The failure to attach the required report would not make the IRS portion of the Form 5500, i.e. the "annual return" portion, incomplete. The IRS has no enforcement authority over requirements arising exclusively under ERISA Title I. Accordingly, the authority you cite is inapplicable. Simply put, the IRS doesn't care about the accountant's report requirement.

Lastly, a comment about practice management. Clients turn to consultants, actuaries, attorneys and accountants for advice about their duties and responsibilities. Most of them determined their tolerance for risk regarding noncompliance with IRS and DOL filing requirements long before they ever heard of Form 5500 and its accountant's report. It is shear folly for professionals to transform themselves into bookies for their clients, evaluating anecdotal evidence about the relative riskiness of noncompliance. For one thing, most of us have no training in the current state of risk assessment science and we lack the raw data to make any kind of precise estimates. More importantly, we have no knowledge about shifting enforcement priorities. In my experience, it's better to tell the client the downside, the availability of any resolution programs and some sense of your experience to give him some way of getting his arms around the financial dimensions of the issue and let it go at that.

[This message has been edited by PJK (edited 05-30-2000).]

[This message has been edited by PJK (edited 05-30-2000).]

[Guest Scott E. Hall]

Remember that in our case the Form 5500 was filed with auditor's reports -- but from a prior year (the 1996, 1997 and 1998 Form 5500s had the 1995 auditor's report attached). It is possible that neither the DOL nor the IRS noticed the date difference.

Further, we can only advise our client of their options -- it remains their decision on whether to correct the deficiency or maintain the risk. I think that it is in their best interests to file under the DOL's program, but we want to be sure we inform them of all options -- including what could happen if they do nothing. Does anyone know the statute of limitaions?

Continued thanks for all of your contributions to this topic. We have learned alot about how to proceed with this client.

Scott E. Hall, MS/MBA, CPA

Vitale, Caturano and Company, P.C.

[Guest RBeck]

As Alonzo points out, the DOL may get tougher since they now have jurisdiction over the 5500s, but the years in Scott's situation are under the perview of the IRS. In my experience, the DOL only assesses penalties if the failure to provide information was proved to be deliberate. If the DOL requests the information through a notice and it is provided within the timeframe outlined in the notice, in my experience, no penalties were assessed.

I can't say that I agree with PJK's assertion that the IRS has not enforcement authority over issues arising exclusively under Title I of ERISA. There's definitely a coordination of authority between IRS and DOL - ERISA section 3004, IRC section 7802(B).

[Guest RBeck]

As Alonzo points out, the DOL may get tougher since they now have jurisdiction over the 5500s, but the years in Scott's situation are under the perview of the IRS. In my experience, the DOL only assesses penalties if the failure to provide information was proved to be deliberate. If the DOL requests the information through a notice and it is provided within the timeframe outlined in the notice, in my experience, no penalties were assessed.

I can't say that I agree with PJK's assertion that the IRS has not enforcement authority over issues arising exclusively under Title I of ERISA. There's definitely a coordination of authority between IRS and DOL - ERISA section 3004, IRC section 7802(B).

[Alonzo]

I would suggest, given the amount of advice that has been dispensed in this thread, that a call to the DoL might be a good idea. The worst they will tell you is what PJK has already said. And you will have something solid to tell your client.

The "DVFC Hotline" is (202) 219-8776.

As with all government lines, the answer may depend on who is manning the phone that day. To cover yourself, you would want some kind of cover letter to go with your amended filing. It will probably be lost when the IRS processes the amended return, but it will give some kind of contemperaneous record to show you are trying to do the right thing.

If you have the time, could you post the answer from DoL? I'm interested on their informal take on the situation.

[pjkoehler]

RBeck, I gather you're of the view that the IRS has enforcement authority for at least some requirements arising EXCLUSIVELY under ERISA Title I. It's difficult to see how you support this view by citing to provisions of ERISA Title III and the IRC. Code Section 7802(B) is particularly mystifying, since it relates to the composition of the IRS Oversight Board (?) You probably meant IRC Sec. 6058(a). Neither Section 6058(a), nor the regulations, require the attachment of an accountant's report. (Of course, if they did, then that requirement wouldn't be arising EXCLUSIVELY under ERISA Title I.) But that is no more controversial than saying that the IRS has no enforcement authority regarding such things as fiduciary breaches, or that the DOL has no enforcement authority over requirements arising EXCLUSIVELY under the IRC.

[Guest Scott E. Hall]

All the debate over the IRS v. DOL aside, I think that the course of action we will take is to advise our clients that a risk exists if they do nothing and suggest that they correct the filings under the DVFC. Although the potential penalty is $20,000, it appears that it is possible to negotiate. The ultimiate decision, of course, will be the clients.

I have placed a call to the DOL (I had to leave a message) and will contact the IRS as well to try and get the official word on our debate. When I have gathered the responses, I'll post them for all to see. Thanks again for all your contributions and replies.

Scott E. Hall, MS/MBA, CPA

Vitale, Caturano and Company, P.C.