How far back can the IRS go when requesting plan info from the ER?

[katieinny]

During a random audit, the employer was asked to provide plan information for 2010, 2011 and 2012. Anomolies turned up and the employer knows that they have to be corrected, including any additional contributions, earnings and penalties. Then the IRS said that they would like information going back to 2006 -- 7 years ago. I thought that 6 years was the limit, unless they can make a case for fraud. Is the 6 year limit just a guideline that doesn't really mean much?

[John Feldt ERPA CPC QPA]

If they find a qualification defect, they can only go baack 3 years for purposes of determining the maximum penalty and sanction - calculated based on the numbers from those last 3 years.

But to determine if the plan has an error, there is no limitation. They could ask for proof that the plan was originally qualified when it was first established, or ask for a copy of the plan's original opinion letter or determination letter.

[KED]

If there will be correction under EPCRS (including Audit CAP), full correction is required, even for closed years. See Section 6.02 -- Correction Principles: "Generally, a failure is not corrected unless full correction is made with respect to all participants and beneficiaries, and for all taxable years (whether or not the taxable year is closed)."

[katieinny]

John: Your comment about the maximum penalty caught my eye. It's already been established that one or more corrections need to be made for the period starting in 2010 and ending in 2012. So, if the same or a different problem were discovered during the 2006 through 2009 years, it would make sense that the employer would have to make whatever corrections are required to make participants whole -- but he doesn't have to worry about problems during those years adding to the penalty. Am I understanding your response correctly?

[John Feldt ERPA CPC QPA]

If they find a significant error in an audit, they will ask you enter into Audit Cap under the assumption that the employer wants to maintain the plan's tax-qualified status. If they find an insignificant error, you should be allowed to self correct.

Under Audit Cap, the fact that an error occurred means the IRS will calculate something I think they call the "maximum payment amount".

With this maximum amount in mind, they look at the seriousness of the error and determine what they think an appropriate sanction should be. They then propose an amount that the employer pays them as a sanction, in addition to any costs needed to fix the plan itself. This negotiation will likely require the entire plan error be fixed in order for the plan to remain qualified. You should be able to negotiate the initial proposed sanction to a lower amount, depending on how generously they had already lowered the amount.

The "maximum payment amount" is generally the tax that would have been paid if the vested benefits in the plan were included in the participant's current income, the plan's earnings were taxable for the last 3 years, and the employer contributions to the plan were not allowable as deductible contributions for those same 3 years.

Does that help?

[katieinny]

John: Yes, I think it helps. Thank you for your response. I guess we're kind of in limbo now because the employer has not been "asked" to enter the Audit Cap program yet. Until he is (if he is), there won't be a calculation to determine what the maximum payment amount would be. Bottom line is that he needs to provide the data going back to 2006 and see if the errors rise to the point of steering him into that program. Then the negotiations can begin. He needs to stop digging his heels in because he believes the IRS can't go back that far and start digging out paperwork instead. He'll have to cross the penalty bridge later.