TEGE Audit of ESOP - Extending SOL ?

Group:

I apologize if this is not the proper forum as I didn't see a forum specifically for audits of qualified plans (ESOP's in my case).

Client's ESOP has been under audit for close to 2 years for plan year 2015.  It's been extended a few times and I'm not exactly sure why.  I believe one reason was that due to the Hurricane from 2017 as client is based in FL and the Miami TEGE office is handling matter.

I'm currently reviewing whether or not to come on board to assist.  The current client rep will most likely be terminated for a number of reasons.  I believe the main sticky issue has to do with leased employees.  I don't have all the info just yet and not sure if soon-to-be-terminated rep will be helpful.  I'm hoping the TEGE auditor will at least provide the sticky issues to me when I'm clients POA/2848 rep.

Q:  For practitioners who handle TEGE ESOP plan audits do you normally sign the SOL extensions? I'm usually of the opinion that signing once or twice is in clients best interest.  But I've never had the situation where there is a third request. 

What is the worse case scenario?  TEGE issues its determination immediately? 

Then client has to be prepared to file admin appeal?  then possibly Tax Court petition?

Thoughts and comments appreciated.  Resource/Guide in TEGE audits/appeals matters?

I've had successful TEGE audits and never had to worry about an appeal.

Best,

Joe

Hi Tax Cowboy, I'm just an internal ESOP administrator but I'd suggest you don't go down the road of getting the TEGE to issue your client an adverse ruling so you an pursue an appeal.  You know ESOP's are so tied into the bank credit agreements and trustees and everyone will get very worried if you get any kind of negative determination.  Who knows what financial triggers would come from just a negative ruling.  And OMG the cost of an appeal!  I'd say get in there and get the issues from the TEGE and tread carefully.  Negotiate a settlement.  If client wants to exclude leased employees or if they want to include them just figure out a way to fix it and move on.

Thank you Cardscrazy!! 

So, in the interim, TEGE sent IDR requesting among other items, copies of all notes receivables and question on 'How did Trustee plan on paying back Note Receivables?'

This isn't that much different than what I've seen in past audits other than the following:

1.  The notes receivables from what I was told with this taxpayer/ESOP were used for expansion of business and were collateralized in case of trustee passing with a life insurance vehicle.  My understanding from prior advisor (who is no longer on board as POA/2848) is that to create a greater ability to pay back notes receivables and biz succession in the event of death/disability.

My question:  Other than replying "the notes receivables were entered into at arm's length transactions using IRS AFR with interest only payments", is there a more focused response you would use?  would you reply with case law?

2.  Another item I'm seeing is that auditor is asking for valuations for a few years.  Usually not an issue.  I've inquired with the TPA handling administration of plan and they inform me the past advisor would normally 'email' the valuation to TPA with rationale for value. 

To make more of a mess, the admin individual has since left the TPA.

I believe the worse case scenario (and I've seen it before) the determination requests the taxpayer (entity) to have a new appraisal performed.

Q:  Is there a response you would provide to create less of an issue? 

Thank you for your sage advice.

Best,

Joe

Sorry for not replying sooner; I'm new to BenefitsLink.  That an ESOP would loan money back to the company is a possible prohibited transaction issue.  That's why the notes are being requested I think.  You'd have to defend that they are not prohibited.  

As far as the valuations, the IRS wants to see that they are legitimate performed valuations.  You shouldn't explain them unless an issue is raised.  Valuations are the property of the trustee so you need the trustee's permission to send them to the government.  We never send the valuations to the TPA, just a signed letter of certification as to what the share value is for the period.

On 2/19/2019 at 1:18 PM, Tax Cowboy said:

Thank you Cardscrazy!! 

So, in the interim, TEGE sent IDR requesting among other items, copies of all notes receivables and question on 'How did Trustee plan on paying back Note Receivables?'

This isn't that much different than what I've seen in past audits other than the following:

1.  The notes receivables from what I was told with this taxpayer/ESOP were used for expansion of business and were collateralized in case of trustee passing with a life insurance vehicle.  My understanding from prior advisor (who is no longer on board as POA/2848) is that to create a greater ability to pay back notes receivables and biz succession in the event of death/disability.

My question:  Other than replying "the notes receivables were entered into at arm's length transactions using IRS AFR with interest only payments", is there a more focused response you would use?  would you reply with case law?

2.  Another item I'm seeing is that auditor is asking for valuations for a few years.  Usually not an issue.  I've inquired with the TPA handling administration of plan and they inform me the past advisor would normally 'email' the valuation to TPA with rationale for value. 

To make more of a mess, the admin individual has since left the TPA.

I believe the worse case scenario (and I've seen it before) the determination requests the taxpayer (entity) to have a new appraisal performed.

Q:  Is there a response you would provide to create less of an issue? 

Thank you for your sage advice.

Best,

Joe

Are you saying the ESOP loaned money to the plan sponsor?

Are you saying the ESOP wasn't getting a formal appraisal of the share value?  

If yes to either there are problems but you seem to know that. 

If yes to the 2nd question how was the appraisal question on the 5500 answered?