Plan Sponsor Withdrew all assets

[Dougsbpc]

We administer a Profit Sharing Plan that had 7 participants for many years. All were terminated back 3 years ago. Partial plan term so all were made 100% vested and paid all their benefits. For the past 3 years, only the company owner who is also trustee has remained. No contributions have been made in the past 6 years.

They just sent us the year end information and investment statements showed the withdrawal of all assets throughout the past year. Upon asking the owner (and only remaining participant) where the money went and he replied "my pockets". He mentioned that he never contacted us because he needed the $400k and felt no need to go through us for the "nonsense" of benefit elections and withholding etc.

Besides the considerable problem of no tax withholding, are there any other problems? He is willing to pay all taxes and pre-mature distribution penalties.

[Bird]

I think the correction is to get the forms signed now, including spousal consent if required.

Just report it as it actually happened on the 1099-R; no withholding. I believe that is a mostly toothless requirement (not that I advocate ignoring it). The fix is for him to pay the tax.

[Kevin C]

You'll also want to make sure the document is up-to-date and have him sign the resolution/amendment (depending on what the document calls for) terminating the plan.

[david rigby]

You may also want to get your fee paid, first.

[Bird]

You may also want to get your fee paid, first.

I was thinking that too. Bells and whistles are going off.

[Guest GeerTom]

Do not go along with this. This guy should have withheld absent an election out of withholding. He also should have jumped through all the regular hoops before taking distributions.

Tell him he's out of compliance, and that he needs to pay over the withholding as such and report and pay all penalties for notice failures, etc. In the alternative, look to the corrections programs. If he doesn't like those choices, tell him to find somebody new, and good luck with that.

You do not want to do anything that can be seen as helping him evade taxes, including penalties. Nor do you want to prepare any false or fraudulent documents. Aside from your livelihood, these things come with criminal penalties attached.

You didn't jump into the quicksand with him, and there's no reason to do it now.

Tom Geer

[Bird]

Sorry, I don't think it's that big of a deal. The correction for not withholding is what, to get the money back and submit it, right? If he just pays the tax everybody, especially the IRS, winds up in the same place. The IRS doesn't care as long as they get their money.

[Guest GeerTom]

The problem is not the payment or the amount, it's the process of fixing it. Nixon didn't get impeached for the Watergate break-in, he got impeached for the coverup.

18 USC 1001 gets you up to eight years, plus fines, for anyone who "in any matter within the jurisdiction of the executive, legislative, or judicial branch of the Government of the United States, knowingly and willfully—

(1) falsifies, conceals, or covers up by any trick, scheme, or device a material fact;

(2) makes any materially false, fictitious, or fraudulent statement or representation; or

(3) makes or uses any false writing or document knowing the same to contain any materially false, fictitious, or fraudulent statement or entry."

See also Code 7206(b).

Go ahead and assume all will be well, but be clear on everything you make or use reflects the actual facts. How far is a judgment call, but if there is no risk to the client I would go pretty far down the road of clarity. And, of course, if there is a risk I wouldn't want to buy into it. By doing so you subject yourself to the whims of the bureaucracy or the bad mood of an auditor. And you have an additional item at risk, the ability to practice before the IRS. The client made the bed, and the client is the only person who should sleep in it.

Tom Geer

[Bird]

OK, but I'm not suggesting a cover-up. Just report everything as it actually happened. No withholding on the 1099-R. Sign the forms now.