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Newsletter
September 2002 Volume 19 - Number 3 |
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This newsletter is addressed to
our clients their attorneys, accountants and other professional advisors.
Citations may be included for those who want to refer directly to the source
material. IN THIS ISSUE:
INTERNAL REVENUE SERVICE RETIREMENT PLAN AUDITS: The IRS
is responsible for checking the continued qualification of retirement
plans. This is accomplished primarily
by auditing retirement plans.
FILE FORM 5500 OR ELSE! The Department of Labor has taken over the
responsibility of processing the annual 5500 returns and has combined
resources with the IRS to identify late and non-filers.
MODIFICATIONS OF PRE-AGE 59½ EXCISE TAX EXEMPTION: The IRS just issued Revenue Ruling
2002-62, which has modified the rules that allow for a pre-age 59½
distribution without incurring the 10% early distribution excise tax.
DOCUMENT
COMPLIANCE WITH GUST AND EGTRRA: The due dates are set and no there are no extensions expected.
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IRS
RETIREMENT PLAN AUDITS
The IRS
is responsible for checking the continued qualification of retirement plans.
The IRS executes this responsibility by reviewing the operation of retirement
plans periodically. This review is commonly referred to as a plan audit.
Plans may also be investigated by the Department of Labor, but DOL
investigations are beyond the scope of this article and should not be
confused with an IRS audit. The IRS accepts most taxpayers’
returns as filed. If they inquire about your return or select it for
examination, it does not suggest that you are dishonest or that the return
was completed incorrectly. The examination may or may not result in more tax
and the IRS may close your case without change; or, you may even receive a refund.
The process of selecting a
return for examination usually begins in one of two ways. ·
First, by using computer programs to identify returns that
may have incorrect amounts. These programs may use information based on
returns, such as Forms 1099 and W-2, on studies of past examinations, or on
certain issues identified by compliance projects. ·
Second, by using information from outside sources that
indicates that a return may have incorrect amounts. These sources may include
newspapers, public records and individuals. If the IRS determines that the
information is accurate and reliable, they may use it to select a return for
examination. Publication 556,”Examination of
Returns, Appeal Rights, and Claims for Refund”, explains the rules &
procedures that the IRS follows. There are two types of examinations. ·
Mail-in Audit. IRS will send you a letter
with either a request for more information or a reason why they believe a
change to your return may be needed. You can respond by mail or you can
request a personal interview with an examiner. ·
Audit by interview: IRS will notify you that they will conduct
your examination through a personal interview. You have the right to ask that
the examination take place at a reasonable time and place that is convenient
for both you and the IRS. You may either represent yourself or, with proper
written authorization, have someone else represent you. Your representative
must be authorized to practice before the IRS, such as an attorney, CPA, or
enrolled agent (Third Party Administrator). You have the right to know why
IRS is asking you for information, how they will use it, and what happens if
you do not provide the requested information. The IRS will not disclose to
anyone the information you give to them, except as authorized by law. Below are some items that may
trigger an IRS Audit as the IRS closely reviews the following plan investment
and transaction categories, which are reported on the Form 5500 - Annual
Return/Report of Employee Benefit Plan: 1. Partnership/joint
venture interest. 2. Employer
real property. 3. Real
estate (other than employer real property). 4. Employer
securities. 5. Participant
loans. 6. Loans
(other than to participants). 7. Tangible
personal property. 8. Any
un-collectible assets. 9. Diversification
of plan assets 10. Large
participant distributions made from the plan Other items commonly reviewed
during an examination: 1. Large
loss caused by dishonesty or fraud 2. Discrimination
to rank-in-file employees? 3. Non-cash
contributions made to the retirement plan 4. Proper
Fidelity (ERISA, Surety) Bond coverage 5. Prohibited
transactions Partnership/joint venture
interest, Employer real property, Real estate, Employer securities must all
be readily determinable on the established market or appraised each plan year
by an independent third party appraiser. Participant loans must be within the
allowable limit, payments made in accordance with the schedule and properly
secured. If a participant loan is in default and triggers a taxable event
(deemed distribution) Form 1099-R must be issued to the participant for the
year in which the loan became taxable. We also expect the IRS will
check the plan documents for compliance with the GUST and EGTRRA law changes.
Members of the Pacific Retirement Plans have many years of
experience in representing the IRS and DOL Audits for our clients. It has
been our experience that most plan audits conclude with a “No Change Letter”
from the IRS. |
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FILE FORM 5500 OR ELSE!
In the
good old days, the IRS was pretty lenient about the late filing of Form
5500s. That has all changed now that the Department of Labor (DOL) has taken
over the responsibility of processing the annual 5500 returns. Now consider
this, it appears that the IRS & DOL have figured out how to use all the
computer equipment that we the taxpayers have been paying for, and are able
to compare and crosscheck the information on their systems to catch late 5500
filers and non-filers. The IRS
& DOL recently announced a joint project to ensure that all retirement plans
have complied with their annual Form 5500 return/report filing requirements.
Failure to do so may result in significant penalties. ·
The IRS may assess penalties of $25 per day (up to
$15,000) for failure to file Form 5500 returns. ·
In addition, the DOL may assess civil penalties of $1,100
per day for failure to file Form 5500 returns. Under the
project, the agencies are conducting research of various databases to
identify potential non-filers. Beginning in December 2002, the agencies will
mail letters of inquiry to those identified as potential non-filers. Delinquent filers should take
advantage of the DOL Delinquent Filer Voluntary Compliance Program (DFVC).
This program has been updated to substantially reduce the penalty amounts for
delinquent Form 5500 reports and non-filers in order to make the program more
accessible and easier to use. Any delinquent or non-filer should also check
their plan documents for compliance with the GUST and EGTRRA law changes. The
DOL also has established the VCP program for late amenders. |
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MODIFICATIONS OF PRE-AGE 59½ EXCISE TAX
EXEMPTION The IRS
just issued Revenue Ruling 2002-62, which has modified the rules that allow
for a pre-age 59½ distribution without incurring the 10% early distribution
excise tax. The changes include: 1. A new
mortality table that provides for longer life expectancy, which results in
lower annual distributions. 2. The
interest rate used to calculate the annual distributions can be up to 120% of
the federal mid-term rate. 3.
Anyone currently using the annuitization or amortization
method may switch to the minimum distribution method, without invoking the
excise tax. This ruling was issued partly in response to the general decline in the stock market. Specifically, under both the annuitization and amortization methods, the amount of the annual distribution is calculated and fixed at the time of the first payment and does not vary from year to year. The minimum distribution method recalculates the amount to be distributed each year, based on the value of the account at the end of the prior year. So, if the value of the account decreases, so does the required distribution. |
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DOCUMENT COMPLIANCE WITH GUST AND EGTRRA The IRS requires that all plan documents comply
with current law. We are diligently
working to complete all of our clients plan restatements before December
2002. Individually designed plan
documents (IDP) must be updated by the later of February 28, 2002 or the last
day of their plan year beginning in 2001, unless the employer executed a
Revenue Procedure 2000-20 Certification of intent to adopt a prototype or
volume submitter plan document by February 28, 2002. Prototype and volume
submitter documents of a practitioner that does not submit specimen documents
for GUST by December 31, 2000 are considered IDP documents for this purpose. Prototype,
volume submitter and plans relying on the 2000-20 certification have until
the later of December 31, 2002 or 12-months from the date of the approval letter
for the GUST volume submitter or prototype specimen. This rule only applies
if the document practitioner filed the specimen plan for an IRS determination
letter by December 31, 2000. The DOL maintains a website listing document
practitioners that submitted specimens, their status and approval dates
(http://www.irs.ustreas.gov/ retirement/article/0,,id=97209,00.html). |
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