Participant Loan / VCP Filing

[austin3515]

Participant repaid a loan for $3,000. The Plan allows for just one participant loan outstanding at a time and his intention was to take out a bigger loan after repayment. He subsequently found out that he could not take the bigger loan he wanted because the plan does not allow for loans from Roth (due to a recordkeeper limitation). Since his plans were foiled he demanded that his loan repayment be returned to him, and the recordkeeper complied because the transaction was based on bad information that they provided. The money was in his account for a week.

Now the client meanwhile thought the loan was repaid and so has not collected any loan repayments for almost a year and of course now the loan is in default. We were recently engaged to file a VCP application.

Question: Was the loan fully repaid with a subsequent impermissible distribution? Or would it be fairly easy to suggest that the loan was simply "reissued" after discovering a misunderstanding?

[jpod]

I think the best option is to take the position that it was a perfectly valid NEW loan for $3,000, but there was an operational error in not coordinating with payroll, and seek correction on that basis.

[austin3515]

Well, but there was no new promissory note or anything...

[Belgarath]

Agree with Jpod - clearly seems to be a repayment - then a subsequent distribution or "loan."

Although IRC 72(p) does not, by itself, directly address the "enforceable agreement" requirement, 1.72(p)-1, Q&A-3(b) does. I'd say it is reasonable to submit a VCP application treating the error as a new loan, with appropriate repayment of outstanding payments, interest, etc..

Having said that, I have not submitted a VCP in just such a situation, so can't say from first-hand experience if the IRS would routinely approve it. Anyone else handled such a submission, and if so, with what results?