EPCRS, or some version of it, is now 23 years old. It really dates back to the first Audit Closing Agreement Program in 1990 and the Administrative Policy Regarding Sanctions (the “APRS”) in 1991. Prior to that time, as many of you will recall, plan disqualification was the sole sanction against which we needed to negotiate with the IRS-negotiations which were often wrapped up in negotiations of the plan sponsor’s own tax liability. I remember one classic deal where we received a pass on the plan penalty for acquiescing on a botched foreign tax credit.
This means that the IRS corrections rules are now based on long experience, and have quite a measure of sophistication and nuance (built of experience) baked into them. It has been continually updated, and the IRS regularly seeks to refresh the program and keep it relevant based upon taxpayer and practitioner input. In short, it’s an IRS program that works (warts and all).
It really shows up in the practical application of the rules. Consider EPCRS’ “Under Examination” rules. If a plan is “Under Examination” it generally cannot take advantage of the more favorable VCP; and SCP is limited- meaning the plan sponsor would need to rely upon the more expensive Audit Cap to fix the problems.
Applying the “Under Examination rules really are interesting, and demonstrates the nuance. For example:
-If the plan sponsor of a 401(a) plan has been notified of an IRS audit of its business tax return (such as the Form 1120), this NOT “Under Examination” for purposes of using VCP or SCP. “Under Examination” is an audit of the Form 5500, not the other business related tax returns of the plan sponsor. It is, however, a heads up that you should probably move fast and fix problems if you want to take advantage of the more favorable VCP and SCP. The agent may open a Form 5500 review as part of the business audit.
-If the plan sponsor of a 403(b) plan is notified of a Form 990 audit (effectively, the information return for a 501(c)(3) org), that IS “Under Examination” for purposes of EPCRS, and VCP cannot be initiated for plan problems at that time. It appears that the source of the rule is that a large number of 403(b) plans are not required to file Form 5500’s, and this is meant to accommodate that issue.
-Notice of a DOL audit, or even an actual DOL audit, does NOT constitute “Under Examination” for EPCRS purposes. As a matter of fact, receiving a DOL notice and then proceeding to use EPCRS to fix a plan problem may be to the employer’s advantage when dealing with the DOL (as you have found a problem and fixed it) if that problem may also constitute a potential fiduciary breach.
A V.P. of Tax for a large company once advised me as a young lawyer many years ago, that “when all else fails, read the regulations.” Even now, when I think I know the answer off the top of my head, or when trying to cobble together a solution, a quick look at the close detail and the nuance of a reg is helpful. EPCRS is no exception…..
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