Leniency/Acceptance on partial corrections?

[Young Curmudgeon]

I have a takeover plan where many years ago a failed ADP test was semi-corrected. The TPA issued 1099s for the corrective distribution amounts and the HCE's paid their taxes however, the assets were never physically removed from the trust.

The old TPA's solution for the years since the failure was to just reduce the trust assets on the 5500 by corrective distribution amounts. We discovered all this when reconciling the trust for 2012.

Objectively, I look at this and think "VCP - one to one correction", but it's a rather large sum of money so the prospect of a one to one correction under VCP is not desirable. Is there any chance the IRS has ever viewed taxation of corrective distributions as sufficient correction?

[BG5150]

If the money was never taken from the trust, why is the old TPA just reducing the amount on the 5500?

The money has to come out, or get redistributed out of the HCE accounts sometime, somehow...

[ESOP Guy]

If the money was never taken from the trust, why is the old TPA just reducing the amount on the 5500?

The money has to come out, or get redistributed out of the HCE accounts sometime, somehow...

Or is there a payable on the 5500 for the distributions? If so, you could make the case the correction is payment of the payable.

To answer the orginal question. I have found the IRS accepts reasonable fixes via VCP. If you can show that everything was done and taxes paid except for the payment of the distribution payables they MIGHT accept that.

[BG5150]

So, are you going to create basis in the HCE accounts? And they get to keep earnings on those amounts?

Just doesn't seem fair--Hey, Mr. HCE, just pay taxes on the amounts now, and we'll let the earnings on it grow tax deferred even though you shouldn't have had these earnings in the first place...