No show jobs and benefits

[ratherbereading]

After coming across some posts about fraud, was wondering about this scenario:  A company's owner gives his 2 daughters a salary, maxes out their 401k contribution, and gives them a safe harbor and profit sharing contribution every year.  They get a W2.  We have tracked their vesting since they are on the census each year with hours listed. They do not work for the company. Ever. Not even for 5 minutes.  Could this be an issue? Is it illegal?

[Belgarath]

Yes, it is tax fraud. I responded to this in your other post. But that's the client's problem, not the TPA's.

[ratherbereading]

Thanks Belgarath!

[david rigby]

Here is the similar discussion:

 

 

[ratherbereading]

Thanks!

[My 2 cents]

 

2 hours ago, KarolineWriter said:

After coming across some posts about fraud, was wondering about this scenario:  A company's owner gives his 2 daughters a salary, maxes out their 401k contribution, and gives them a safe harbor and profit sharing contribution every year.  They get a W2.  We have tracked their vesting since they are on the census each year with hours listed. They do not work for the company. Ever. Not even for 5 minutes.  Could this be an issue? Is it illegal?

Not a lawyer and not someone who practices in the small plan 401(k) arena.  Just wondering - if the daughters have not ever worked for the company, not even for 5 minutes, what is being reported for hours?  In the other discussion thread, at least the owner's wife would go in an do something useful on occasion.  How could the company justify anything paid to the owners daughters here as compensation?  Wouldn't the 401(k) contribution be limited to what was actually being paid as compensation for services rendered (as opposed to what could only otherwise be characterized as distribution of profits or even diversion of company assets by the owner). How is any aspect of this not, at best, tax fraud?  As a taxpayer, I have no reason to want them to be able to do this.

[ratherbereading]

My 2 cents -- they report 1000 hours for his 2 daughters.  Their compensation is over $60,000 so no issue with going over any limits re. contributions.

[ESOP Guy]

The next obvious question is if they report a 1,000 hours how do you know the don't ever work for the company?

Are they telling you the census data is false? They could be doing that but it seems odd.  I say that because if they know they aren't working but reporting 1,000 hours that pretty much is admitting they know they are breaking the rules by sending false data because they know you need that data to make it all work. 

Then I guess the question really might be what is your obligation knowing the data is false?

[ratherbereading]

ESOP Guy - I've been doing this plan since 2005 and deal with the accountant a lot. He is the one who told me they don't work there. At all. They both have other full-time jobs. That's why they cannot make 401k contributions at their other jobs. Yes, they know it's false!  Yes, not sure what my obligation is, if anything.

[My 2 cents]

36 minutes ago, KarolineWriter said:

ESOP Guy - I've been doing this plan since 2005 and deal with the accountant a lot. He is the one who told me they don't work there. At all. They both have other full-time jobs. That's why they cannot make 401k contributions at their other jobs. Yes, they know it's false!  Yes, not sure what my obligation is, if anything.

I may be taking an overly cautious approach to this situation, but it is not my style to spend time socializing with my clients, especially if they are in prison for tax fraud.

[ratherbereading]

I'm not socializing with my client and he's not in prison.

[My 2 cents]

Just now, KarolineWriter said:

I'm not socializing with my client and he's not in prison.

Trying to apply some subtle humor here (probably too subtle and too negative).  I meant socializing with the client after they are sentenced to prison for tax fraud.  As a fellow inmate.  Is it really worth your while to provide services to so sketchy a client?

[ratherbereading]

Ahh. Sorry, My 2 cents. I usually get humor... I agree, but as the TPA, not sure if we should step in and address.

[hr for me]

Your knowledge is from a third party (the accountant) -- is he an actual employee of the business?  Who signs the 941/940 federal payroll tax reports? I would think he (and they) have much more liability than you do.

However, I wonder if some type of statement that they provide with the data about it "being accurate and true to their knowledge" would provide you any more protection? Or would that just prove that you had your suspicions?

But someone can have another FT job and still work in the family business from home, consulting, etc.  So not totally ruling out the fact that they might actually do some work at least... Our company has a few of these types of employees that one would never see "at work" but work from home, etc.

[ratherbereading]

hr for me - No, the accountant is not an employee of the business. Not sure who signs the federal payroll tax reports.

[RatherBeGolfing]

From a professional responsibility point view, Circular 230 and the code of conduct for most professional organizations make it pretty clear that you can't perform services to the client based on information you know to be false or incomplete. 

[Belgarath]

But, this is really "hearsay." Just because the accountant said this doesn't mean it is true, and you have actual knowledge that fraud is being committed. I reiterate my opinion that it is not your problem. (I will also say that nearly every standard census gathering sheet that I've seen or the engagement letter, etc., would all say that you are relying on the accuracy of the information provided by the client)

[ratherbereading]

Thanks Belgarath. Not going to lose sleep over it!

[david rigby]

Interesting.  So, absent this (alleged) action, the taxable income of the owner (or perhaps the company) would greater, but each daughter's income generates more FICA tax.  Is that about it?

 

[ratherbereading]

That's it!

[ESOP Guy]

18 minutes ago, david rigby said:

Interesting.  So, absent this (alleged) action, the taxable income of the owner (or perhaps the company) would greater, but each daughter's income generates more FICA tax.  Is that about it?

 

I guess from the IRS' view if the parent is in a much higher tax bracket then the kids there could be a net tax loss after the payroll taxes are taken into account. 

There could be estate tax consequences but that could get murky fast.

It would be an all depends on the facts kind of situation. 

However, I have never heard of the IRS going after a TPA because someone else is playing the tax bracket game with family members. 

I agree with others at this point it is alleged problems not known problems. 

[Peter Gulia]

Just so we all learn together, let me ask what BenefitsLink mavens think about a variation on the hypothetical situation:

Assume the TPA is not a signer or preparer of any tax return.

The TPA performs all requested work using the data set its client furnished.  In delivering the TPA's report to its client, the TPA includes written explanations calling out that the owner's daughters' service and compensation information seems doubtful.  The TPA explains that the results would be different if the work assumed different amounts.  The TPA explains that the plan might be misadministered (and might be tax-disqualified) if a contribution was determined from an amount that is not really compensation for services rendered.

The employer/administrator receives the report, confirms that it understands the TPA's advice, and makes no change.  The employer and administrator file the plan's Form 5500 report and all tax returns of the employer and business assuming the daughters' false compensation and contribution, and the business's deductions and other tax treatments based on them.

By explaining correct information to the TPA's client, has the TPA's employee done what her profession's ethics rules ask of her?  Is there something further the TPA's employee must do?  Is there something further the TPA's employee should do?  What, if anything, must the TPA's employee refrain from doing?

For each of these questions, why?

 

[ratherbereading]

Looking forward to responses to your post, Peter!  Thanks for laying it out that way.

[RatherBeGolfing]

In your example, is the TPA subject to Circular 230 or any professional code of conduct? For example, is the TPA an ERPA, EA, ASPPA or NIPA member etc?

[Belgarath]

Interesting exercise, but to be honest, I would never dream of questioning or "calling out" the service of the daughters, based upon the statement by the CPA that they don't work there. I feel like that crosses a line (what line, I'm not sure) but I frankly don't think it is my business to question that. Now, if the CLIENT had told me the daughters don't actually work there, that's a different circumstance altogether. Then I'd just resign as TPA. Can't correct egregious fraud under VCP!

P.S. - question for the CPA's out there- is the CPA violating any professional ethics by telling this to the TPA?

[John Feldt ERPA CPC QPA]

Maybe I misunderstand, but isn't 415 compensation limited to reasonable compensation for services rendered to the employer? Thus making their 415 limit zero? So regardless of their W-2, if the reasonable compensation is $0, then any allocation is over the 415 limit. If that's correct, you do have issues with going over the limits.

[Peter Gulia]

RatherBeGolfing, I put in my variation of the hypo "Assume the TPA is not a . . . preparer of any tax return" because I believe a preparer must disassociate herself from a tax return she believes to be false.

But assume the TPA's employee is an ASPPA member.  Does the report and warning described in my hypo meet a member's duties under ASPPA's Code of Professional Conduct?

[RatherBeGolfing]

48 minutes ago, Belgarath said:

Interesting exercise, but to be honest, I would never dream of questioning or "calling out" the service of the daughters, based upon the statement by the CPA that they don't work there. I feel like that crosses a line (what line, I'm not sure) but I frankly don't think it is my business to question that. Now, if the CLIENT had told me the daughters don't actually work there, that's a different circumstance altogether. Then I'd just resign as TPA. Can't correct egregious fraud under VCP!

P.S. - question for the CPA's out there- is the CPA violating any professional ethics by telling this to the TPA?

I agree, I take my client's representation to me at face value and I don't cross that line either.  If a client tries to involve me in a tax avoidance scheme or  fraud, I would just resign and move on. Also, I don't think any of the CPAs I work with would tell me "oh by the way, Dr. Payne is giving his kids a salary so they can defer but they they never actually work for him".  Even if that was the case, why volunteer that information in the first place?

 

[Peter Gulia]

Belgarath, you're right to think about whether the client authorized, whether expressly or by implication, the certified public accountant to reveal confidential client information.

[Peter Gulia]

Belgarath, what if the observer is an employee of the TPA (and not a shareholder, partner, member, or other owner of the TPA)?  The employee tells everything to the TPA's owner, who says the TPA firm won't do anything further.

Has the TPA's employee discharged her personal duties under ASPPA's code?

 

[RatherBeGolfing]

20 minutes ago, Fiduciary Guidance Counsel said:

RatherBeGolfing, I put in my variation of the hypo "Assume the TPA is not a . . . preparer of any tax return" because I believe a preparer must disassociate herself from a tax return she believes to be false.

But assume the TPA's employee is an ASPPA member.  Does the report and warning described in my hypo meet a member's duties under ASPPA's Code of Professional Conduct?

Even if the TPA is not actually preparing the return, you still have the issue of control of work product.  The short answer would be you can't perform professional services if you have reason to believe that your work will be used to violate or evade the law.  So you can't do the work but wash your hands of it just because you prepare the return.  Circular 230 also includes language regarding errors or omissions from any return, not just the returns prepared by the practitioner.

[Peter Gulia]

The point about misuse of an ASPPA member's work product is why I put in my hypo that the warnings about the client's wrongdoing are in the report.

Circular 230 has a provision that might apply to a "practitioner" even if she is not a preparer.  Here's the text:

A practitioner who, having been retained by a client with respect to a matter administered by the Internal Revenue Service, knows that the client has not complied with the revenue laws of the United States or has made an error in or omission from any return, document, affidavit, or other paper which the client submitted or executed under the revenue laws of the United States, must advise the client promptly of the fact of such noncompliance, error, or omission.  The practitioner must advise the client of the consequences as provided under the [Internal Revenue] Code and regulations of such noncompliance, error, or omission.

 

So is the report's warning that the plan might be misadministered and tax-disqualified enough?  Or must a practitioner say something more?

 

But even if it is something more, doesn't section 10.21 (quoted above) mean that the only person a non-preparer practitioner must communicate to is her client?

 

[My 2 cents]

For what it's worth, apparently the only thing enrolled actuaries are required to report to the government is the knowledge that an actuarial certification intended to be filed with the government has not been filed (and not any known tax evasion or fraudulent activities).

Of course, there ought not to be any active involvement by the enrolled actuary in any fraud or tax-evasions.

[RatherBeGolfing]

I don't think the caveat is enough if you believe that your report / calculations will be used to violate or evade the law.  You are obligated to inform the client of the consequences but you also have to remove yourself from the violation.

[John Feldt ERPA CPC QPA]

I agree. I would say you are also not protected against government action against you even if the client signs a "hold harmless" letter for your actions. Meaning if you knew that your actions were assisting a client commit fraud, you are now stepping into the same sinking boat that your client is in. When it sinks, the hold harmless letter won't stop you from sinking too.

[Peter Gulia]

John Feldt, while I agree with the idea that a TPA should not go along with its client's wrongdoing, how would the Internal Revenue Service make the TPA's employee responsible if the evidence shows she rendered correct advice (and further explained all tax consequences that would result if the client insists on the wrongdoing)?

[MoJo]

37 minutes ago, Fiduciary Guidance Counsel said:

John Feldt, while I agree with the idea that a TPA should not go along with its client's wrongdoing, how would the Internal Revenue Service make the TPA's employee responsible if the evidence shows she rendered correct advice (and further explained all tax consequences that would result if the client insists on the wrongdoing)?

Pardon my jumping in here - fascinating thread and a variety of positions....

I think the answer to the question posited above is "if you KNOW or SHOULD HAVE KNOWN that you were facilitating your client's fraud, you have liability - EVEN IF you explained to them that what they were doing was incorrect.  Merely completing the form with data you KNOW or SHOULD HAVE KNOWN to be incorrect causes you to incur liability."

Now, keep in mind, if there is an honest disagreement, or a reasonable basis for doing what they are doing, an appropriate CYA may protect you - but if it clearly is not appropriate, then your facilitation of that act can be problematic.

PLUS, it'll ruin your reputation for being a "professional" at what you do.

Personally, I'd address it delicately with the client.  A discussion around "pay is "comp" for plan purposes ONLY IF it's for work performed.  "Hours" means hours ACTUALLY WORKED (or in some limited circumstances, that which you should have worked and been paid for), and the like.  Depending on the circumstances, I'd even say to the client, "your accountant said..." and have a discussion about the merits of maintaining the plan as a tax qualified plan.

If all else fails, I'd probably fire the client (and I know, business is business, but you won't get many new clients if you let an existing client do something really really wrong.

Let me posit an extension of the hypothetical:  Suppose you do nothing and the client get's audited and this is discovered, plan disqualified.  Client talks to accoutnant, accountant say "I TOLD THE TPA - experts in the field, and they did NOTHING."

You think people might be looking to you for "malpractice" as "experts" in the field who knew something was amiss and didn't bring it to their attention?

By the way, under any scenario, the accountant is toast....

[ratherbereading]

On ‎1‎/‎6‎/‎2017 at 3:21 PM, Belgarath said:

Interesting exercise, but to be honest, I would never dream of questioning or "calling out" the service of the daughters, based upon the statement by the CPA that they don't work there. I feel like that crosses a line (what line, I'm not sure) but I frankly don't think it is my business to question that. Now, if the CLIENT had told me the daughters don't actually work there, that's a different circumstance altogether. Then I'd just resign as TPA. Can't correct egregious fraud under VCP!

P.S. - question for the CPA's out there- is the CPA violating any professional ethics by telling this to the TPA?

Later reply but I totally trust the CPA on this. He's very close to the client, he signs the 5500 for him, does all the payroll, so he is definitely telling the truth.

[Belgarath]

Well, if you are completely convinced that the CPA is giving you accurate information, you could always adopt the policy of "Brave Sir Robin" - "When danger reared its ugly head, he bravely turned his tail and fled..."

I'm just shocked that a CPA, (regardless of whether or not such disclosure violates any professional ethics) would actually tell this to anyone. Oh well, fortunately not my problem. Good luck with this client relationship.