Leveraged ESOP and failure to make loan payment

[Tax Cowboy]

Group:

In 2017 taxpayer/client sets up a leveraged esop where loan payments were to be made by Oct. 15 of each successive year.  Client has recently began an audit by TEGE dept.. No IDR response nor any site visits have taken place.  Client failed to make first year loan payment due Oct 2018.

Do I wait to cure late loan payment before auditor even questions why payment was not made?  After discussing with the TPA I'm leaning towards curing late loan payment + interest prior and make this part of our response in an effort to get in front of potential issue.

What has been your collective experience in auditors view on late ESOP loan payments and curing?  For what it's worth, there are a number of communications from advisors informing client to set up separate ESOP account but no account was even set up.

Thoughts and comments appreciated.

Warmest,

Joe Dadich, CPA, Esq.

[A Shot in the Dark]

You do not mention the type of ESOP Loan in your Post, i.e., "inside" loan between ESOP and Employer, or a  loan directly to a seller(s).

I would not take into consideration the forthcoming audit and move to correct the missed payment as required. The steps that I would take would be:

• Immediately contact ESOP legal counsel and seek their legal advice
• Review the language in Stock Purchase and Redemption Agreement as well as any Loan Agreements to determine:
  • Any cure method for missed payment stipulated in the agreements
  • Loan Default Provisions

Other things to consider:

• Tax Deduction Issues
• ESOP allocation issues