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Esop Audit question

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I may not state this properly so bear with me. 

Entity A, Inc. sells 100% of stock to an ESOP with name of 'A, Inc. ESOP AND PROFIT SHARING PLAN' in 2011.

ESOP files for EIN and uses such for all 5500 filings. 

Entity A is audited for tax year 2012 and 2013. Which resulted in a no change determination letter. 

Fast forward, Entity A ESOP is now under audit for same years (2012 and 2013) and all years  through 2017.

I'm coming in late to the proverbial game as 2848/attorney and client has already signed audit extensions prior to my involvement. 

Q: Are there any cited cases/internal revenue manual cites/other supporting sources, that stand for the proposition that the ESOP was effectively audited for 2012/2013 with these facts?  

I note there seems to be very little case law about whether or not these facts can support a collateral estoppel or res judicata argument. And it's usually not favorable to taxpayers. 

Thoughts and comments are appreciated. 

Thank you 

Joe Dadich, CPA, Esq. 

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I am not sure how much I can help as audits  aren't my area of specialty.  But are you saying the IRS is taking the position the name change of the plan from ESOP and Profit Sharing Plan to just ESOP makes these two different plans?  

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What did you mean when you said ESOP files for EIN and uses such for all 5500 filings?  Why didn't Entity A - as the Plan Sponsor - file 5500s?  Also, you said that Entity A was audited for 12 and 13, so what would that have to do with an audit of the Plan?

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It's an interesting theory, but I'm not aware of any case law to your point. But I would think if you can show them that the 2012 and 2013 audits included an examination of the ESOP, you might be able to get them to drop those years from their current inquiries. Perhaps there is still someone at Entity A who could speak to that.

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Collateral estoppel and res judicata have absolutely no relevance here.  There is a provision in the IRC that, and I am paraphrasing and generalizing, prohibits redundant examinations, but I don't see how the case here where Entity A and the Plan are two different taxpayers.  I don't see how the Plan's ownership of Entity A is relevant.

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Thank you for your responses.

First response re: ESOP name, I misspoke, the only name discrepancy is between actual entity audited which

was the plan sponsor (Entity A, Inc.).  My understanding (and probably heart of my question) is that the auditor themselves

would have reviewed and audited the owner of said plan sponsor. ie. the ESOP (I'm leaving out the full name

for simplicity.  Entity A, Inc. Employee Stock Ownership and Profit Sharing Plan aka 'ESOP'.)

Fast forward, the ESOP is now under audit for same years.

My question pertains to whether or not Entity A, ESOP (condensed name for simplicity) has a leg to stand

on that it was already audited for years in question?


Second response:  I don't know why Entity A - plan sponsor - did not file 5500's.  The TPA reflects the 'Entity A, Inc. ESOP'

as the plan name on the 5500's.  Entity A, Inc. is noted as plan sponsor on 5500.

To your second point: 'what would that have to do with an audit of the plan'.

I'm trying to find support/case/other arguments

that show that 2012/2013 audit of plan sponsor (Entity A, Inc. in my facts) was a de facto audit of the 'ESOP Plan' itself.

Therefore, no reason for the Service/IRS to have ability to audit for those years. 

My possibly thin argument is that an auditor reviews the tax returns of entity under audit along with affiliated

entities, and other relevant tax information which includes its owners.  The auditor (from my own discussions

with client/taxpayer) says that the auditor reviewed 5500's that were filed.  I note that 'reviewing a 5500 may

not be actual 'auditing' of said filing. However, why would an auditor review a 5500 if they were not looking

for compliance? just to look at it?

Wouldn't the converse be true:  if the auditor found discrepancies in a 5500

while auditing only the plan sponsor (Entity A, Inc.) in this matter, the Service would

follow-up with new IDR's and possibly resulting in Notice of deficiency or disqualifying

the plan itself.

Yes, it's a long shot, but I doubt this is the first time for IRS auditing plan sponsor

one year then waiting years later to audit the ESOP Plan itself.

In the end, i'm looking to see if this meets definition of Collateral Estoppel/Res Judicata

by any thin argument/stretch. 

Thank you for all thoughts and comments.


Joe Dadich, CPA, Esq.


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