The Employee Plans Compliance Resolution System (EPCRS) is a powerful self-correction tool provided by the IRS, giving plan sponsors the opportunity to right almost any self-identified error under its three component programs. But what about errors that can’t be corrected in EPCRS?
The IRS’s Voluntary Closing Agreement Program May Be Solution
The IRS’s Voluntary Closing Agreement program (VCA) is designed to resolve retirement plan problems – in a negotiated settlement – that don’t fall under its Employee Plans Compliance Resolutions System.
VCA is appropriate for any situation involving income taxes or excise taxes due to retirement plan failures that cannot be fixed in EPCRS.
The failure could involve any type of retirement plan, including a:
- Qualified plan under Internal Revenue Code (Code) section 401(a).
- Code section 403(b) plan.
- Simplified Employee Pensions (SEPs)
- IRAs under Code section 408(k).
Code section 457(b) and Code section 457(f) plans are not eligible for VCA.
Some examples of VCA-type situations include:
- Prohibited transactions.
- Rollovers for business startups (ROBS) gone wrong.
- Improper in-service distributions.
- Defaulted participant loans.
- Failed ESOP compliance tests.
- Improper financial hardship distributions.
What If You Are Already Under Audit?
The plan or plan sponsor cannot be under examination or investigation or have any matters on appeal with the IRS or before the Tax Court when the VCA request is submitted. This is a much broader standard than the “Under Examination” standard that prevents an issue from being submitted in the Voluntary Correction Program (VCP) under EPCRS.
What Cannot Be Submitted For Correction Under VCA?
If the issue is something that can be corrected in VCP, then it should be resolved in accordance with EPCRS as contained in Revenue Procedure 2016-51. Abusive tax avoidance transactions are also not eligible for a closing agreement in VCA. Finally, a voluntary closing agreement is not available if there has been a willful and intentional plan to avoid or evade paying or reporting taxes.
What Happens If The Plan Is Audited After You File?
A VCA request does not prevent an IRS examination of the plan or the plan sponsor. If a plan sponsor submits an application in VCP under EPCRS, the IRS is prevented from auditing the plan with respect to the issues contained in the VCP application for a compliance statement. This is not the case with VCA.
If you are audited while a VCA request is pending, you can still be subject to an examination. If you are audited by the IRS, you will need to inform the IRS agent that there is a VCA request pending and the IRS may or may not exclude the issue from examination depending upon the facts and circumstances.
However, the fact that you had already begun to address the correction of the issue will be a significant factor to the IRS in considering a lower audit sanction penalty amount than they may have imposed if you had not filed the VCA request.
How Do You Request A Closing Agreement?
A taxpayer requests relief from the income and excise taxes applicable to the violation by submitting a detailed letter that explains the following:
- The problem, including how and why it occurred, number of people affected, and amount of contributions, distributions, etc.;
- How you will correct the identified problem or issue;
- How you calculated the tax, interest or penalties;
- Calculations of any tax or correction method included in your request; and,
- Proposed sanction amounts and an explanation justifying the amount.
In addition, the IRS states that in order to increase the likelihood that the IRS will enter into a voluntary closing agreement, a taxpayer should be prepared to show that the:
- Taxpayer is willing to furnish necessary facts and documentation to establish its tax liabilities;
- Agreement is in the best interest of both the IRS and the taxpayer;
- Federal government will suffer no disadvantage from entering into the closing agreement, and that any Internal Revenue Code violation or tax deficiency was unintentional.
VCA can be complicated and may take time and effort to compile the information required to be submitted and to draft the detailed explanation. However, IRS audits and negotiating a Closing Agreement with the IRS in the Audit Closing Agreement Program (Audit CAP) can be longer and costlier.
VCA also comes with peace of mind and certainty that your plan participants have been treated right.
If you have a client with a sticky retirement plan situation that seems impossible to fix, we are here to guide you through the process.