Audit CAP - Calculation of "Maximum Payment Amount" for DB Plan

[Übernerd]

Is there a resource somewhere on precisely how the MPA would be calculated for a large DB plan? We need to get our arms around the potential exposure. Rev. Proc. 2013-12 lays out the basics, but if you try to drill down there are many ambiguities. E.g., the MPA includes the additional tax if the employer deduction is disallowed for contributions--does that include vested contributions (which are deductible even for a nonqualified plan). How is participant income-inclusion calculated for a plan with hundreds of participants? And does the IRS calculate the MPA, or does it merely review the employer's own calculation? Is the MPA estimated based on the Form 5500 alone, or is there a massive review of other documents? Etc.

Thanks for any info.

[Flyboyjohn]

1. No resource to my knowledge.

2. Up to IRS not you to calculate and threaten the MPA.

3. An informal survey at a recent practitioner meeting indicated the largest sanction anyone knew had been paid was only $40,000, interested to hear experience of others.

4. Personal experience indicates local (Virginia) recurring sanctions of either $5,000 or $12,000, no clue how they determine which applies.

5. Wondering if there's a secret schedule of sanctions coming out of national or regional audit cap offices?

[Übernerd]

Thanks, that's about what I thought. I've since learned (from the IRS) that they will calculate the MPA but you can do it yourself (subject to their review) if you prefer. I believe there is a "secret schedule" of sanctions--the agent I dealt with on another audit said as much. (I came into that audit after the MPA had been calculated, and it was for a DC plan.)

[Flyboyjohn]

Maybe if enough practitioners chime in with their audit cap sanction experience we can decipher the IRS secret schedule.

[Übernerd]

I think that's a great idea. I believe the schedule for nonamender failures is straightforward, so the real mystery is what percentage of the MPA practitioners have seen assessed against employers for various operational failures.

Here's what the IRM says:

7.11.8.2.2 — Determining Sanction Amount and Correction

[Last Revised: 03-07-2014]

....

(5) For failures other than nonamender failures, the sanction will be based upon the calculated maximum payment amount (MPA). To calculate the MPA, the specialist will need to determine:

• a. Which tax years have an open statute of limitations.
• b. The taxpayer's Form 1120, U.S. Corporate Income Tax Return tax exposure for all years for which the statue of limitations has not expired.
• c. The highly compensated employees (HCE's) Form 1040, U.S. Individual Income Tax Return tax exposure for all years for which the statue of limitations has not expired.
• d. The potential liability to the trust if taxes are payable with the Form 1041, U.S. Income Tax Return for Estates and Trusts for all years for which the statue of limitations has not expired.
  Note: A tax estimation worksheet is located on the shared server in the folder labelled “Closing Agree.”

(6) After calculating the MPA, the specialist will submit the following to the closing agreement coordinator:

• a. The MPA calculations.
• b. A summary of the pertinent issues.
• c. Any mitigating factors submitted by the taxpayer.
• d. Any corrective actions already taken by the taxpayer.

(7) The closing agreement coordinator will provide the specialist with a sanction range. The specialist is responsible for the sanction negotiation.