TE Compliance Unit Letter for 1 participant plan

Our client, a sole proprietor, took on a partner and formed an LLC in late 2017.  We did a resolution of the LLC changing the sponsorship of the plan to the LLC from the SP, as a sole proprietorship never dissolves.

We faxed a letter to Ogden informing them of the change.

A Form 5500-SF was filed for 2017 under the SP EIN; we filed a 2018 5500-SF under the LLC and used the LLC EIN, noting the change in sponsorship in item 4.

Our client receives a letter from the TE Compliance Unit inquiring as to why the 2018 Form 5500-SF for the sole proprietorship had not filed a 5500-SF.  The Notice mentioned that this was not an audit, just a compliance check.

I spoke at length with the IRS person that wrote the letter and explained the circumstances (without a POA at that!)- she said she would note the file and that we call main IRS number; and they would be able to make the change, but we must make one of the two selections: 

a.  either file the two plans as a merger, which makes no sense at all; or

b.  file the sole proprietor plan as a "final return" and $0 at the end of 2017; show the LLC plan as a "new plan and show the money transferred from the sole prop plan in 2018.

Neither of these choices really make any sense, but the woman at the IRS when I did call only mentioned that "this is the way they told us to handle".

Usually when we receive an IRS Letter or Notice, we attach an explanation and receive about 4-5 love letters before the matter is resolved..

I am inclined to go with option b., if, as they say "this is the only way to handle."

What does one report on Form 5500 if—with no merger of a plan into another plan—a business acquirer assumes obligations to maintain a plan that had been sponsored and administered by the acquired business?

Is it anything more than what thepensionmaven describes, including about item 4?

(I’m aware that with most acquisitions the acquirer does not assume the acquiree’s plan.  But there must be at least some.)

Even if one accepts the chore of tricking the IRS’s defective computer systems, one might be reluctant to do a or b alone because either makes an untruthful statement (and does so under penalties of perjury).

If a client chooses to appease the IRS with b, one might add an attachment to explain that the plan is not a new plan and the report is not the first report.

Do not appease. Escalate!!

I hate (much more than most practitioners) giving in to the weaknesses of governments’ systems.

But the problem of government forms and systems being unable to handle correct reporting of proper information has become severe.  And it’s a problem of national, State, and local government functions.  Some of these problems have real consequences.  (But I'll end my rant here.)

I agree with Mike, don't appease.  We either had that nonsensical answer or I read about it here.

Honestly if the letter is what I think it is there is a place to indicate that the return was in fact filed but with a different TIN; complete that section and it should go away.

I too say don't appease, at least not for the Form 5500 processing mentioned.

My observation was much more general about how defects in government forms and systems push lawyers and other advisors to advise clients about the bad consequences of correct reporting.  While a decent advisor doesn't advise a client to make a false or misleading statement, one may give full-picture advice about consequences.  It's sad that an advisor sometimes is pushed to render that kind of advice.  It's even worse that sometimes a client is pushed to consider incorrect reporting as a way to not suffer bad consequences from a government's broken systems.

OK, so the suggestion is...... ?

Wait for an official IRS Notice concerning the filing?

We already wrote in and explained the circumstances.

2 hours ago, thepensionmaven said:

OK, so the suggestion is...... ?

Wait for an official IRS Notice concerning the filing?

We already wrote in and explained the circumstances.

What part of escalate is unclear? Call them back and if they insist on silliness your response is to request a conversation with their supervisor.