Close Years, Open Years for IRS Audit

[Below Ground]

Client receives letter for typical 5500 Audit for 2015 Plan Year (calendar year).  Form filed was Form 5500-EZ for Owner & Spouse.  During audit it was discovered that data submitted by Client does not tie into W-2 of Spouse.  Looking back it is determined of the years back to plan inception (2007), only 2 years tie into the Spouse's actual W-2 for that year.  During the other years the Spouse's income was slightly overstated by $1,400.  Result is that monies allocated in those years exceed maximum deductible contribution.

Question:  Is related penalty tax only applicable for 3 years back, and does that mean 2015, 2014, 2013 and 2012?

 

[RatherBeGolfing]

Was a Form 5500-EZ filed for each year 2015-2007, or did they rely on the under $250k asset filing exemption for any of the years?

[ESOP Guy]

I don't think the Form 5500 statue of limitations (SOL) is the guiding SOL. 

You owe an excise tax on the over contributions for all those years and that is done by filing a Form 5330.  Since it doesn't sound like you ever filed any of those has any SOL started?  It would seem like the relevant SOL would start with that form not the 5500. 

I think you owe for all the years back to 2007.  Willing to be told I am wrong as I can't think of any cite to say I am correct but I don't see the 5500 SOL is being applicable. 

What is true since that excise tax is cumulative whatever years you do pay will be effected by those older prior year.

I will add if you can show that this was an innocent error and once discovered was fixed quickly the penalties for late filing and late payment are often times waived by the IRS if you ask.  I have had much success getting late Form 5330 penalties waived over the years.  This leave the client only paying the tax and interest.  The IRS never waives interest. 

[Below Ground]

ESOP Guy: On another site, the consensus seems to be that the agent can ask for data back to inception, but the computation of the tax is limited to the Open Years.  2013 - 2015.  You disagree?  Based upon case involving a "pizza outlet".

They file because they are over the $250K mark. They had to file starting around 2009.

Thanks for your replies!

[RatherBeGolfing]

3 hours ago, ESOP Guy said:

I don't think the Form 5500 statue of limitations (SOL) is the guiding SOL. 

You owe an excise tax on the over contributions for all those years and that is done by filing a Form 5330.  Since it doesn't sound like you ever filed any of those has any SOL started?  It would seem like the relevant SOL would start with that form not the 5500. 

I agree, those were not the SOLs I was looking for... 

OP,

Indeed,  Pizza Pro Equipment Leasing, Inc. v. Commissioner of Internal Revenue seem to be on point here.  The SOL that would control is the 5330 SOL, not the 5500 SOL.   I agree with ESOP Guy, you owe for all years going back to inception.
 

I am curious though, what was the other site's argument for applying the 3 year SOL? Also of interest would be when that argument was made since the Pizza Pro case is fairly recent.

[spiritrider]

The current version of the IRM lists the 5330 in the chart under 25.6.1.6.4. I have no idea if or when this recently changed. What is less clear to me is why the 5330 is not covered like the 5329 has been forever in 25.6.1.9.4.3.6. It is certainly a form reporting more than one item of tax.

25.6.1.6.4  (09-20-2016)
Statute of Limitations Chart for Tax Returns

The filing of the Form 5330 starts the running of the statute of limitations, except for the section 4975 excise tax, the filing of the Form 5500 starts the running of statute of limitations for section 4975 excise tax. It is 3 years if the information is disclosed and 6 years if it is not disclosed on the applicable form.

25.6.1.9.4.3  (04-01-2007)
Forms Reporting More Than One Item of Tax

[ESOP Guy]

Aren't there questions on the Form 5500 that would let the IRS know there is a violation for the 4975 violation?  That isn't true for over contributions. 

That logic seems consistent with the pizza case logic used by the court. 

[ESOP Guy]

By the way link to IRM

https://www.irs.gov/irm/part25/irm_25-006-001r.html#d0e1004

 

[RatherBeGolfing]

3 hours ago, ESOP Guy said:

Aren't there questions on the Form 5500 that would let the IRS know there is a violation for the 4975 violation?  That isn't true for over contributions. 

That logic seems consistent with the pizza case logic used by the court. 

The way I understand it, you could do an "other" attachment to the 5500 with a statement that an election is made under 4972 that no taxes are owed.  This would start the SOL just like filing a "protective" 5330 to start the SOL. 

The court rejected the argument that NOT filing a 5330 is the same as filing a 5330 showing $0 owed.

There was a good ASPPA article on it that I read earlier today, I'll see if I can find it and post the link.

[Below Ground]

Wow, I really appreciate these posts.  Knowing that what I am about to say is not relevant, it just seems crazy.  A problem is discovered that was previously unknown, and because it was unknown (not something being hidden), the penalty is maximized!  A "protective 5330" highlights the utter nonsense.  And yes, it shows why good data is so important; and yes the client needs to take that issue seriously.  A problem we all face we certain clients.

Anyway, if you find that ASPPA article that would be much appreciated.  I have also had a follow-up posted to the other site.

Again, thanks.  Peer review is such an important resource.

 

[RatherBeGolfing]

Pizza Pro v. Commissioner – Where Do We Go From Here?

 

Here you go!