Under Examination for VCP Eligibility?

[shERPA]

Plan sponsor is a sole proprietor with a DB plan that has not been restated for EGTRRA. The sponsor's 2012 1040 is being audited by the IRS. No exam of the plan - so far. Is this sponsor eligible for VCP? Section 4.02 of RP 2013-12 says:

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.02 Effect of examination. If the plan or Plan Sponsor is Under Examination, VCP is not available and SCP is only available as follows: while the plan or Plan Sponsor is Under Examination, insignificant Operational Failures can be corrected under SCP; and, if correction of significant operational failures has been completed or substantially completed (as described in section 9.04) before the plan or Plan Sponsor is Under Examination, correction of those failures can be completed under SCP.

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"Under Examination" is capitalized, so looking to the definition of this phrase in Section 5.09, (posted below) it seems to me that a 1040 audit does not create any of the situations that fit the definition of "Under Examination". The sponsor is not under an EO audit, just a tax audit, so VCP should be available.

What say the BL brain trust? Thanks.

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.09 Under Examination. (1) The term "Under Examination" means: (a) a plan that is under an Employee Plans examination (that is, an examination of a Form 5500 series or other Employee Plans examination); (b) a Plan Sponsor that is under an Exempt Organizations examination (that is, an examination of a Form 990 series or other Exempt Organizations examination); or © a plan that is under investigation by the Criminal Investigation Division of the Service.

(2) A plan that is under an Employee Plans examination includes any plan for which the Plan Sponsor, or a representative, has received verbal or written notification from Employee Plans of an impending Employee Plans examination, or of an impending referral for an Employee Plans examination, and also includes any plan that has been under an Employee Plans examination and is in Appeals or in litigation for issues raised 26 in an Employee Plans examination. A plan is considered to be Under Examination if it is aggregated for purposes of satisfying the nondiscrimination requirements of § 401(a)(4), the minimum participation requirements of § 401(a)(26), the minimum coverage requirements of § 410(b), or the requirements of § 403(b)(12)(A)(i), with any plan that is Under Examination. In addition, a plan is considered to be Under Examination with respect to a failure of a qualification requirement (other than those described in the preceding sentence) if the plan is aggregated with another plan for purposes of satisfying that qualification requirement (for example, § 401(a)(30), 415, or 416) and that other plan is Under Examination. For example, assume Plan A has a § 415 failure, Plan A is aggregated with Plan B only for purposes of § 415, and Plan B is Under Examination. In this case, Plan A is considered to be Under Examination with respect to the § 415 failure. However, if Plan A has a failure relating to the spousal consent rules under § 417 or the vesting rules of § 411, Plan A is not considered to be Under Examination with respect to the § 417 or 411 failure. For purposes of this revenue procedure, the term aggregation does not include consideration of benefits provided by various plans for purposes of the average benefits test set forth in § 410(b)(2).

(3) An Employee Plans examination also includes a case in which a Plan Sponsor has submitted any Form 5300, 5307, or 5310 and the Employee Plans agent notifies the Plan Sponsor, or a representative, of possible failures, whether or not the Plan Sponsor is officially notified of an "examination." This would include a case where, for example, a Plan Sponsor has applied for a determination letter on plan termination, and an Employee Plans agent notifies the Plan Sponsor that there are partial termination concerns. In addition, if, during the review process, the agent requests additional information that indicates the existence of a failure not previously identified by the Plan Sponsor, the plan is considered to be under an Employee Plans examination. If, in such a case, the determination letter request under review is subsequently withdrawn, the plan is nevertheless considered to be under an Employee Plans examination for purposes of eligibility under SCP and VCP with respect to those issues raised by the agent reviewing the determination letter application. The fact that a Plan Sponsor voluntarily submits a determination letter application does not constitute a voluntary identification of a failure to the Service. In order to be eligible for VCP, the Plan Sponsor (or the authorized representative) must identify each failure, in writing, to the reviewing agent before the agent recognizes the existence of the failure or addresses the failure in communications with the Plan Sponsor (or the authorized representative).

(4) A Plan Sponsor that is under an Exempt Organizations examination includes any Plan Sponsor that has received (or whose representative has received) verbal or written notification from Exempt Organizations of an impending Exempt Organizations examination or of an impending referral for an Exempt Organizations examination and also includes any Plan Sponsor that has been under an Exempt Organizations examination and is now in Appeals or in litigation for issues raised in an Exempt Organizations examination.

[ETA Consulting LLC]

You may hold tight until the tax audit is done and then file VCP for non-amenders they may not choose to examine the plan under the current audit. I wouldn't attempt to argue that is not currently under examination when there is a tax audit on the company. The term 'or other Employee Plans examination' appears to be pretty vague.

Good Luck!

[Kevin C]

I disagree. The definition is pretty clear about which IRS groups' activities are included in "under examination" and what activities constitute being "under examination" What you have described is not included in the definition. But, the current audit could lead to them being "under examination".

Look at it from the other direction. Suppose you wait and the tax group finds something of interest dealing with the plan and decides to refer the case to Employee Plans. When they are told they will be referred to EP, they are "under examination" and anything significant the IRS finds gets fixed under Audit Cap. Do you think an EP audit won't notice that the plan wasn't amended for EGTRRA?

[shERPA]

Thanks. I tend to agree with Kevin that the definition is clear. Furthermore IMO the "safe" thing to do is file the VCP ASAP. Worst case is the IRS says it was not eligible for VCP so it's back to Audit CAP (which is where they'd be if they don't file the VCP - assuming the tax audit would lead to a plan audit). Also as a practitioner if we have an opportunity to get it into VCP and I don't advise them to take advantage of this opportunity it could be an omission on my part.

[ETA Consulting LLC]

Suppose you wait and the tax group finds something of interest dealing with the plan and decides to refer the case to Employee Plans.

How would the tax group find something of interest dealing with the plan without that being considered 'other Employee Plans examination'. I say this because the worst case scenario would be the penalty of perjury the client will be charged with from the statement being signed saying that they are not under examination. FWIW, it believe you're right based on 'plain language', but we've all seen these types of episodes play out in tax court (remember the 1 IRA rollover per year).

Good Luck!

[Scuba 401]

agree with kevin. under examination is pretty clearly defined.

[Briandfox]

Don't know the answer, but in these situations if you disclose the issues on audit (in good faith) shouldn't they give you the opportunity to do VCP following the examination?

What if you were in the middle of working on a complex VCP submission and got audited before everything was assembled for submission, does that mean straight to audit cap?