Penalty for Filing Exempt Form 5500-EZ After Deadline

[WDIK]

I am curious if anyone has run into a similar situation as a colleague of mine.

Plan assets are well below the $250,000 filing requirement, but Form 5500-EZ has always been filed.  For the 2020 plan year, a filing was made after the extended due date.  The IRS has assessed an extremely large penalty.  When my colleague spoke with the IRS, he was told that since the form was filed (even though it was not required), the penalty applies.  The IRS representative did offer the option to write a letter asking for the penalty to be waived but gave no guarantee of relief.

This makes little sense to me.  (I know, what else would you expect from the IRS.)  What do the rest of you think?

[Belgarath]

Without doing any research, I would agree with you, and I think the IRS person is full of (something). I'd ask to speak to a supervisor. But, I may the one who is full of it...

[Bird]

I dunno, a form was filed, and it was late. They might be onto something in that the voluntary filing triggers the penalty even though it was not required. In any event I would beg for mercy, and do it again if they say no. Repeat as necessary until they see the light/logic.

Stating the obvious - never file late and just wait to see what happens! Both the DOL and IRS programs are super-reasonable. (I know it's not your case, WDIK.)

[Bri]

Is something late if it's never due?

[CuseFan]

So they could have not filed and been ok but because they did file but late there's a penalty? I can see the letter of the law and robo-IRS response but agree that it's crazy. I assume filings were made even though not required to start statute of limitations? I would write the letter to request abatement and pursue through further legal channels if not resolved favorably (i.e., no penalty or penalty less than legal fees).

Then, to get my revenge, assuming assets continued to remain under $250,000, file an EZ every other year. There's no requirement that once you start filing you must continue, right? I saw that response recently on here where assets went from >$250k to <$250k.

[RatherBeGolfing]

6 hours ago, Bri said:

Is something late if it's never due?

The return has a due date.  The return was filed after the due date.

[Dare Johnson]

The IRS agent is correct - if you file a tax/information return (even if not required to file), then penalties can be assessed.  The plan sponsor's options depend on the notice #.  If a CP 283 notice, then the plan sponsor has 2 choices - write a letter begging for abatement of penalties (if denied, keep writing letters and maybe another agent will approve) or request the one time penalty abatement.

[Luke Bailey]

I had a similar situation about a year ago. An employer that was governmental filed a late 5500 for their 403(b) plan on the advice of their platform vendor's rep. I corresponded with IRS and told them that the employer was governmental and should not have filed. Took a few months, but the IRS abated all penalties. The Service Center person with whom I spoke prior to sending letter seemed to understand that penalties should not have been assessed if form should not have been filed. Employer has stopped filing.

[Lou S.]

I could be wrong, but this seems like the exact situation that a "reasonable cause" letter should abate all penalties. Something along the lines of "We request the late penalties be waived as the return was not required to be filed."

 

[Bob the Swimmer]

Agree with Lou--suggest you write a letter to the Service under IRC 
Section 6652(e) pleading reasonable cause. That Code section says "failure to file a return....required (under the various sections) "  which this was not.

We have not been denied in our 47-year history of filing about a dozen of these under various fact patterns.

[Belgarath]

Is your answer the same if a Governmental non-ERISA plan, which is not subject to 5500 filing requirements, files a 5500, but files it "late" - you can't turn a Governmental plan into an ERISA plan by filing a 5500. So suppose a penalty is imposed. Is that the IRS reviewer "correct" that since a form was filed, and filed late, a penalty is imposed as mentioned in prior posts? Seems counterintuitive, but maybe that's the way things work.

[RatherBeGolfing]

1 hour ago, Belgarath said:

Is your answer the same if a Governmental non-ERISA plan, which is not subject to 5500 filing requirements, files a 5500, but files it "late" - you can't turn a Governmental plan into an ERISA plan by filing a 5500. So suppose a penalty is imposed. Is that the IRS reviewer "correct" that since a form was filed, and filed late, a penalty is imposed as mentioned in prior posts? Seems counterintuitive, but maybe that's the way things work.

Different situation, different answer.

A one participant plan is still subject to Form 5500-EZ, but you are not required to file if you meet certain criteria. As you point out, you cant turn a governmental non-ERISA plan into a plan covered by ERISA by filing a Form 5500.  Late filing penalties does not apply because the plan is not subject to Form 5500.

[Luke Bailey]

4 hours ago, Belgarath said:

Is your answer the same if a Governmental non-ERISA plan, which is not subject to 5500 filing requirements, files a 5500, but files it "late" - you can't turn a Governmental plan into an ERISA plan by filing a 5500. So suppose a penalty is imposed. Is that the IRS reviewer "correct" that since a form was filed, and filed late, a penalty is imposed as mentioned in prior posts? Seems counterintuitive, but maybe that's the way things work.

So Belgarath, IRS had actually imposed large penalties on my client. That is what got their attention. As others have referenced, the letter we wrote did state that we had "reasonable cause" for not filing, even though we had filed previously. IRS eventually agreed that no penalties were due for not filing a form that was not required and frankly they don't want, right, because if they target a governmental plan for any sort of action based on an issue with 5500 it's just a waste of everyone's time.

[VeryOldMan]

Luke--I like your remarks here, " we had reasonable cause for not filing, even though we had previously filed." In the case involving my client, we filed in 2020  thought assets < $250,000.. IRS Clerk said the fact that we filed a return overrides our reasonable cause approach based on the $250000 exemption. I don't see how any written rule of law was violated. Meanwhile Interest charges are mounting and we're wondering if we should pay the fees or talk to a lawyer. It just doesn't feel right to give in.

[Luke Bailey]

VeryOldMan, yes, I think you should talk to a lawyer and do it quickly.