Plan Disqualification?

[katieinny]

As sometimes happens with one-person plans, the owner took multiple distributions that he intended to repay to the plan.  This goes back more years than there are records for.  In some cases, repayments were started, but not completed.  The IRS is doing a compliance check, and has offered VCP as an option for the owner.  The owner knows that there will be significant tax and maybe penalties to pay on these distributions. He's getting up in years and has his hands full with other things, so he's thinking of biting the bullet and letting the IRS disqualify the plan.  He'll pay the tax on the entire balance and move on.  Now that it's gotten this far, I doubt that simply terminating the plan is a viable solution.  Any amount rolled over would probably be disqualified, since an audit is very likely in the not too distant future.  Have any of you gone through a plan disqualification?  Other than paying the tax (no small thing, I know), how painful is it?

[My 2 cents]

What about back taxes, interest and penalties for the years in which he took money out?  Did he declare those payments as ordinary income and pay taxes on them?  Disqualifying the plan is unlikely to spare him back taxes, penalties and interest for underpayment of taxes over a period of years.  If it's egregious enough, there could even be jail time for tax evasion.

If the IRS is offering him a clean slate for a payment of $X, perhaps that is the easiest and cheapest way out, almost irregardless of what $X is.