Filing Form 5500 without audit and correcting within 45 days

Client files 5500 without required audit and assume will file the audit shortly, well within the 45-day period required so that DOL will not impose penalties. Assume that as of the date the audit is received by DOL the client has not been contacted for late filing by IRS. Is there a legal basis for IRS to impose late filing penalties, and a risk that it will do so, even after the audit is filed within the 45-day period, in which case client should file the 5500 with audit under DFVC, even though not facing actual exposure to DOL penalties? Or does filing the audit within 45 days also get them off the hook with IRS?

My understanding is that while DOL will not impose penalties, the IRS is not bound by the DOL decision. As to whether the IRS will impose penalties in practice, I don't know the answer but I believe a similar thread on a closely related topic was discussed not too long ago.

If I recall correctly the implication of that thread was that the practice of filing without the audit and correcting in 45 days may be of questionable usage going forward with respect to the IRS.

This was the relevant thread

Thanks, Lou S. So as the folks in that conversation were saying, it will be important to see whether IRS has changed its policies in a systematic way or whether austin3515's experience was a one-off.

I guess for counselling clients in this situation (filed without IQPA by the deadline, and then filed the IQPA under EFAST within the 45-day period), it may depend on how soon after the deadline they file. If you're 10 days late, you need to way the DFVCP penalty of $2,000 against IRS exposure of $2,500 (10 x $250), or 20 days late against $5,000, etc. Until you get well into the 45-day period it's sort of a push, since the IRS penalties are not a certainty.

Interestingly, the IRS guidance on waiving its late penalty if you've made a DFVCP filing (on the IRS website at https://www.irs.gov/retirement-plans/irs-penalty-relief-for-dol-dfvc-filers-of-late-annual-reports, and Notice 2014-35), would seem to say that even in this situation (i.e., where the IRS has for some reason sprung into action with its penalty within the 45-day DOL statutory "grace" period), you can avoid any IRS penalty by filing under DFVCP, assuming you meet the other qualifications of Notice 2014-35. To me that indicates that the IRS should probably not bother contacting the employer until after the expiration of the 45-day period.

FWIW, I have talked to a lot of auditors in October, and none had seen the type of scenario that Austin brought up in the other thread.

12 hours ago, Luke Bailey said:

Interestingly, the IRS guidance on waiving its late penalty if you've made a DFVCP filing (on the IRS website at https://www.irs.gov/retirement-plans/irs-penalty-relief-for-dol-dfvc-filers-of-late-annual-reports, and Notice 2014-35), would seem to say that even in this situation (i.e., where the IRS has for some reason sprung into action with its penalty within the 45-day DOL statutory "grace" period), you can avoid any IRS penalty by filing under DFVCP, assuming you meet the other qualifications of Notice 2014-35. To me that indicates that the IRS should probably not bother contacting the employer until after the expiration of the 45-day period.

I agree, guidance is clear that even after IRS issues a penalty for late filing, you can avoid the penalty by filing DFVCP.  Personally, that's how I think late audits should be corrected.  The practice of attaching the audit coming soon letter has become so pervasive that I'm not seeing much urgency from auditor's anymore.  They used to push and push once you are within a few weeks of the filing deadline, but now many of the auditors will just ask us to attach an audit coming soon letter.

Filing the 5500 without the audit and just attaching the coming soon letter has always bothered me because of this statement on page one:

Caution: A penalty for the late or incomplete filing of this return/report will be assessed unless reasonable cause is established. Under penalties of perjury and other penalties set forth in the instructions, I declare that I have examined this return/report, including accompanying schedules, statements and attachments, as well as the electronic version of this return/report, and to the best of my knowledge and belief, it is true, correct, and complete. (bolding is my doing).

When your clients file without the audit, are they leaving Schedule H part III blank? Does the IRS and/or DOL not care about this statement? Or is everyone who files late relying on "reasonable cause" (which I doubt is established in most cases). Or does this statement have nothing to do with the attachment?

Thanks for your help. I have just never understood how that statement relates to knowingly filing an incomplete form. 

22 hours ago, Luke Bailey said:

Is there a legal basis for IRS to impose late filing penalties, and a risk that it will do so, even after the audit is filed within the 45-day period, in which case client should file the 5500 with audit under DFVC, even though not facing actual exposure to DOL penalties? Or does filing the audit within 45 days also get them off the hook with IRS?

Once you file timely (without the audit), the filing is deficient not delinquent; therefore DFVCP is no longer an option. At least that is how an EBSA agent explained it to me a while back. Curious if everyone agrees. Maybe the IRS is catching on and sent this letter quickly knowing they can't remedy this via DFVCP and are now subject to IRS penalties??

You raise interesting points, WCC. The statute could, I think, be interpreted in the manner you set forth, but thankfully I think the DOL's position in their regulations is to make the 45-day period penalty free (at least for DOL) if the IQPA is filed before the end of the 45-day period. See 29 C.F.R. 2560.502c-2(b)(3). They seem to pretty clearly reject that interpretation of the statute.

5 hours ago, WCC said:

When your clients file without the audit, are they leaving Schedule H part III blank? Does the IRS and/or DOL not care about this statement? Or is everyone who files late relying on "reasonable cause" (which I doubt is established in most cases). Or does this statement have nothing to do with the attachment?

As for the above question, I have struggled with that myself in the abstract, but I don't prepare 5500's and have thought that ignorance is bliss on that one.

On 11/4/2022 at 1:41 PM, WCC said:

Once you file timely (without the audit), the filing is deficient not delinquent; therefore DFVCP is no longer an option.

My issue with this is that the filing is either timely or it is not timely, it cant be both at the same time.  As far as I'm aware, the reason you can get penalized for an incomplete filing is that a materially incomplete return is treated as if the return was never filed.  If it is treated as if it was never filed, DFVCP should apply until you are notified by the DOL of a failure to file.  The friendly DOL emails do not count as being notified of a failure to file.

It doesn't make sense for the IRS to treat you as late while the DOL doesn't. 

6 hours ago, RatherBeGolfing said:

It doesn't make sense for the IRS to treat you as late while the DOL doesn't. 

You're asking for consistency across government agencies? That might be asking too much right now.

18 minutes ago, Lou S. said:

You're asking for consistency across government agencies? 

Yea that might be the definition of insanity....

6 hours ago, RatherBeGolfing said:

My issue with this is that the filing is either timely or it is not timely, it cant be both at the same time.  As far as I'm aware, the reason you can get penalized for an incomplete filing is that a materially incomplete return is treated as if the return was never filed.  If it is treated as if it was never filed, DFVCP should apply until you are notified by the DOL of a failure to file.  The friendly DOL emails do not count as being notified of a failure to file.

RBG, your reasoning makes sense, but I think that under the DOL regulation that I cited you are off the hook with DOL as long as you complete the filing with the IQPA within the 45-day period that DOL gives you for that, with no DFVCP needed for DOL. However, it does not appear that you would necessarily be off the hook with IRS, which is why DFVCP might still be advisable if you're worried about the IRS penalty.

44 minutes ago, Luke Bailey said:

However, it does not appear that you would necessarily be off the hook with IRS

I agree, but where does the IRS get the authority to treat an otherwise timely return as untimely?   Unlike the DOL regs, I dont think the code sections relating to 5500s and IRS penalties address failure to provide material information.

2 hours ago, RatherBeGolfing said:

I agree, but where does the IRS get the authority to treat an otherwise timely return as untimely?   Unlike the DOL regs, I dont think the code sections relating to 5500s and IRS penalties address failure to provide material information.

 

That's probably correct, RBG. The Code requirement to file is separate, as are the penalties, but I think that there is probably a good argument that the IRS should follow the DOL regarding whether the filing is complete or not or has been timely corrected so as to not subject the filer to penalties. I am unaware of anything in the Code or Treasury Regulations that specifically addresses the audit requirement. The IRS could probably take the position that under IRC sec. 6047(d) it has authority separate from DOL to require the IQPA and has done so under the 5500 form and its instructions, which it takes joint credit for with DOL. But it's not clear to me that they would take that position and I would hope that if they did they would not prevail, given that the requirement for the IQPA is based on the statutory provision in ERISA, not the Code.

Regarding the 45 day "grace" period, does the DOL send the client a letter stating they have 45 days or does one just keep track and make sure it gets filed with that time period. I had an auditor asking if the client received a letter form the DOL regarding the 45 days.

Coleboy, my recollection from the last time I was involved in a case like that is that yes, the DOL did send a letter. Your mileage may vary.

Thanks Luke! I've never had to deal with this before. These auditors are dragging their feet!

Coming back to this thread to add some complexity...

A few years ago, the DOL started sending email reminders when a plan had not filed a return but the DOL expected one to be filed.  These usually arrived 30-60 days after the filing deadline.  We just received a similar emails for several plans, but in this case the email says that the return was received without the IQPA report, and that the filing must be amended to include the report in order to avoid a DOL rejection of the filing and possible assessment of penalties.   There is no time limit or deadline mentioned in the email.

This is the first time I have seen this communication in email format, I have seen plenty of "we haven't received your filing" emails.   Has anyone else received this email before and did the DOL follow up with a formal 45 day letter after?

I just received this same communication via email last Friday. I forwarded to the accountants in hopes that this will push them to finish the audit instead of dragging their feet.

Some audit delays result because the plan’s administrator failed to furnish, or cause to be furnished, information the accounting firm reasonably requested.

And some delays result because the auditors uncover a nonexempt prohibited transaction, fiduciary breach, serious error or omission in the plan’s financial statements, lack of control, or other point that precludes rendering a “clean” report.

But if the delay truly and fairly is the accounting firm’s fault, hinting at the accounting firm’s liability exposure for its client’s penalties sometimes can be a way to motivate auditors to finish their work and release their IQPA report. In my experience, there are ways a client might politely and deftly hint.