4.71.3  "Unagreed" Form 5500 Examinations and Delegation Order 8-3 (DO 8-3) Closing Agreements

Manual Transmittal

May 09, 2014

Purpose

(1) This transmits a complete reprint with changes for IRM 4.71.3, Employee Plans Examination of Returns, Unagreed Form 5500 Examination Procedures and Delegation Order 8-3 (DO 8-3) Closing Agreements.

Background

IRM 4.71.3 contains procedures for examining, processing and closing "unagreed" Forms 5500, Annual Return/Report of Employee Benefit Plan.

IRM 4.71.3 also contains procedures for resolving plan qualification issues through a DO 8-3 closing agreement.

Material Changes

(1) This revision makes minor clarifying corrections to the September 12, 2012, published version of IRM 4.71.3.

(2) The links to the IRM Exhibits have been updated. The Exhibits are now posted on TE/GE Connect under the JOB tab at IRM 4.71 - Employee Plans Examination Exhibits.

Effect on Other Documents

This supersedes IRM 4.71.3 dated September 12, 2012.

Audience

TE/GE, Employee Plans

Effective Date

(05-09-2014)


Robert Choi
Director, Employee Plans
Tax Exempt and Government Entities Division

4.71.3.1  (05-09-2014)
Overview of "Unagreed" Form 5500 Examinations and Delegation Order 8-3 (DO 8-3) Closing Agreements

  1. The Employee Plans (EP) examination program was established to ensure compliance with the provisions of Internal Revenue Code (IRC) 401(a).

  2. Plan qualification issues (IRC 401(a) failures) discovered through a Form 5500, Annual Return/Report of Employee Benefit Plan, examination can be resolved through:

    1. Employee Plans Compliance Resolution System (EPCRS).

    2. A Delegation Order 8-3 (DO 8-3) closing agreement.

    3. The "unagreed" case process.

  3. Most qualification issues discovered on EP exams are resolved under EPCRS. EPCRS guidelines are covered in IRM 7.2.2, Employee Plans Compliance Resolution System (EPCRS), and Rev. Proc. 2013-12.

  4. When qualification issues cannot be resolved through EPCRS, they will either be:

    1. Resolved through a DO 8-3 closing agreement or

    2. Processed as an "unagreed" case.

  5. Agents should follow the guidelines and procedures in IRM 4.71.1, Overview of Form 5500 Examination Procedures, when conducting Form 5500 examinations up to the point the issues in the case become "unagreed" (for example, the resolution of the qualification issues cannot be agreed upon with the taxpayer). This section covers procedures to process a case from the time it becomes "unagreed" until it is closed to EP Mandatory Review.

  6. This section also provides procedures for processing agreed revocation and non-qualification cases resolved through DO 8-3 closing agreements.

  7. All "unagreed" cases closed to EP Mandatory Review must have a complete hard copy case file in accordance with IRM 4.71.12.4, Assembly Guidelines for All "Unagreed" Examinations.

4.71.3.1.1  (05-09-2014)
Definitions

  1. An "unagreed" Form 5500 examination is one that involves a qualification issue that cannot be resolved through EPCRS or a DO 8-3 closing agreement.

  2. The term revocation is used to refer to the proposed disqualification of a plan that has a prior determination letter issued in the plan's name.

  3. The term non-qualification is used to refer to the proposed disqualification of a plan that has no prior determination letter.

  4. Any reference to Form 5500 in this IRM also includes Form 5500-EZ, Annual Return of One-Participant (Owners and Their Spouses) Retirement Plan, and Form 5500-SF, Short Form Annual Return/Report of Small Employee Benefit Plan.

4.71.3.2  (05-09-2014)
Addressing Issues that Effect Plan Qualification

  1. When an agent discovers an issue on an examination of a plan that has the potential to result in the revocation or non-qualification of the plan, the agent will discuss the issue with the group manager before formally advising the taxpayer that the IRS is proposing disqualification of the plan.

    1. The purpose of this discussion with the group manager is to confirm that the facts are being properly analyzed by the agent, to determine the issues that should be pursued and to determine whether the issue(s) can be resolved through EPCRS.

    2. The agent should not proceed with the proposed revocation/non-qualification until the agent and the manager have determined that the issue cannot be resolved through EPCRS or that the taxpayer has declined this option.

  2. When a qualification issue is determined to exist, the examination should generally be expanded to include subsequent years (and possibly prior years).

    1. See IRM 4.71.1.14.1 for procedures to open an examination of a related Form 5500 that has been filed.

    2. If a subsequent year Form 5500 return is due but has not been filed, the agent should solicit a delinquent return from the plan sponsor. See IRM 4.71.1.21 for delinquent and substitute Form 5500 procedures.

  3. Document managerial involvement and guidance on Form 5464, Case Chronology Record (CCR).

  4. The agent will also use the CCR (or similar document) to record in clear, legible form, a factual accounting of all conferences and/or telephone conversations with the taxpayer or taxpayer's representative (representative).

    1. Since the administrative record in declaratory judgment cases (which includes proposed revocation/non-qualification cases) consists only of the documentation that was submitted in writing and exchanged between the parties, it is vital that the agent formally document all discussions and conferences for the record and share them with the taxpayer/representative.

    2. If the agent wants pertinent portions of the CCR or similar documentation included in the administrative record, he or she must send them to the taxpayer/representative in letter format. The pertinent portions should include, but are not limited to any discussions with the taxpayer or representative that are relevant to the audit scope, affirmation of tax liability or the qualified status of the plan.

  5. After full development of the relevant issues, the agent will present proposals for resolution to the taxpayer/representative.

    1. This provides the taxpayer/representative an opportunity to agree with the agent's proposal(s), make appropriate modifications to resolve the issue(s), present additional facts for consideration, and/or present his/her position.

    2. The agent should make every effort to resolve the issues at the lowest possible level.

    3. The agent should advise the taxpayer/representative that the additional facts will not be considered a part of the administrative record unless they are reduced to writing and provided to the IRS.

  6. If the plan qualification issue can be resolved through EPCRS or through a DO 8-3 closing agreement, the agent should offer the taxpayer the opportunity to enter into negotiations for a closing agreement.

    1. See IRM 7.2.1 and IRM 7.2.2, and Rev. Proc. 2013-12 (as updated periodically) for EPCRS Audit CAP closing agreement procedures.

    2. See IRM 4.71.3.4 for DO 8-3 closing agreement procedures.

  7. The agent must clearly explain the qualification issue(s) to the taxpayer in writing by issuing a preliminary Revenue Agent’s Report (RAR).

    1. This preliminary RAR should satisfy parts "a" through "d" of the final RAR, but should be clearly notated as a "Draft" or "Preliminary" copy. See IRM 4.71.3.3.3 below.

      Note:

      Mandatory Review will mail out the final RAR with the 30-Day Letter (Letter 1756 or Letter 1758). See IRM 4.71.3.3.2 below.

    2. The preliminary RAR is important for two reasons. First, it is written documentation that the IRS clearly discussed (with adequate authority cited) specific issues with the taxpayer. Second, it places the document in the administrative record for declaratory judgment purposes.

    3. The agent must mail the preliminary RAR with an individually designed cover letter to the taxpayer and give the taxpayer sufficient time to provide a response, prior to closing the case "unagreed" to Mandatory Review.

  8. The agent will propose revocation/non-qualification of the plan, and the case will be closed "unagreed" to Mandatory Review, if the qualification issue cannot be resolved.

  9. Areas of Mandatory Technical Advice – Certain issues such as violations of the exclusive benefit rule under IRC 401(a)(2) (for plans that fall under Title I of ERISA) and the proposed revocation/non-qualification of a collectively bargained plan requires mandatory technical advice.

    Note:

    See Rev. Proc. 2014-5 (as updated annually) and IRM 4.71.13.5.1 for a complete list of issues requiring mandatory technical advice.

4.71.3.2.1  (05-09-2014)
Tax Effect of Plan Revocation/Non-Qualification

  1. Disqualification of a plan in any given year causes the plan to be disqualified in that year and in all subsequent years.

    1. In general, once a plan is disqualified, it remains non-qualified unless the plan is re-qualified through a closing agreement.

    2. A plan may be disqualified in a year for which the Form 5500/1041 statute has already expired. Although tax cannot be assessed in a barred year, the consequences of disqualification continue for all subsequent years and tax can be assessed in subsequent years for which the statute is still open.

    3. The IRS's ability to pursue a qualification issue in any year is not impacted by the Form 1041, U.S. Income Tax Return for Estates and Trusts, statute of limitations. The expiration of the statute of limitations for Form 1041 for any given year does not prevent the IRS from pursuing a qualification issue in that year (see Yarish Consulting, Inc. v. Commissioner, T.C. Memo 2010-174).

  2. The tax effect of revocation/non-qualification includes the following:

    1. Realized earnings of trust assets are taxable each year the plan is not qualified (if the assessment of tax is not barred by statute). Trust earnings must be reported on Form 1041, which must be filed annually, on a calendar year basis by the trustee.

    2. Per IRC 402(b)(4), if the plan is disqualified for failure to meet IRC 401(a)(26) (participation failure) or 410(b) (coverage failure), each Highly Compensated Employee (HCE) must include in income an amount equal to the employee's entire vested accrued benefit (or account balance) not yet included in income.

    3. Per IRC 402(b)(1), if the plan is disqualified for any reason, plan contributions allocated in a given year to any plan participant (HCE or non-HCE) in a defined contribution plan, (in a defined benefit plan the increase in the present value of the accrued benefit) are taxable on the plan participant’s Form 1040, U.S. Individual Income Tax Return, to the extent nonforfeitable.

      Note:

      If a participant is not fully vested, amounts that become vested in a subsequent year will be taxable in the subsequent year to the extent they become vested.

    4. In a defined contribution plan, contributions allocated to participant accounts are not deductible on the plan sponsor’s tax return (for example, Form 1120, U.S. Corporation Income Tax Return) to the extent they are forfeitable by the participant.

    5. In a defined benefit plan, in most instances none of the contributions made are deductible on the plan sponsor’s tax return (for example, Form 1120), because separate accounts are not maintained in a defined benefit plan. If there is only one participant, the employer can deduct the contribution to the extent the participant includes the contribution into income.

      Note:

      Per IRC 404(a)(5) and Reg. 1.404(a)-12, the employer can deduct the amount of the employer’s contribution in the non-qualified year to the extent that the amount is includible in the gross income of employees participating in the plan only if separate accounts are maintained for each employee where there is more than one employee.

    6. Per IRC 402(b)(2), distributions made from the plan are not eligible for rollover to another qualified plan or to an IRA, and therefore, are taxable to the individual on his/her Form 1040 in the year of the distribution.

    7. Any funds rolled into an IRA from a plan that is determined to be not qualified under IRC 401(a) are subject to excise tax on excess contributions under IRC 4973.

    8. Any funds rolled from a non-qualified plan to a qualified plan can potentially cause the recipient plan to be non-qualified.

  3. The agent should compute the tax effect of the revocation/non-qualification for all open years, beginning with the year under examination and going forward and include a copy of the tax calculations in the case file with the RAR when the case is closed to Mandatory Review.

    Note:

    Subject to managerial approval, prior years calculations will also be considered.

4.71.3.3  (05-09-2014)
Unagreed Form 5500 Procedures

  1. If the qualification issue is not resolved through EPCRS or a DO 8-3 closing agreement, the agent will follow the procedures in paragraphs (2) through (17).

  2. Solicit Form(s) 1041 from the trustee. See IRM 4.71.3.3.1 below.

  3. Pick up prior and subsequent year Forms 5500 for examination (at the discretion of the group manager and in some cases the discretion of the Area Manager or the Director, EP Examinations). See IRM 4.71.1.14.1.

    1. In general, the examination should be expanded to include subsequent year Forms 5500 that are due.

    2. If the subsequent year returns are not included in the examination, the group manager will prepare a written statement in the case chronology, in a memo, or in an email for inclusion in the workpapers, giving the reasons the subsequent years are not included.

    3. In some instances, it may be necessary to open an examination of a year in which the normal statute of limitations has expired. This is the case when the IRS has determined that an operational issue has occurred that retroactively disqualifies the plan.

    4. The IRS's ability to pursue a qualification issue in any year is not impacted by the Form 1041 statute of limitations. The expiration of the statute of limitations for Form 1041 for any given year does not prevent the IRS from pursuing a qualification issue in that year (see Yarish Consulting, Inc. v. Commissioner, T.C. Memo 2010-174).

    5. If plan or trust records are solicited for a given plan year, that year is considered to be under examination and the agent must establish the Form 5500 on Audit Information Management System (AIMS) and Reporting Compliance Case Management System (RCCMS) even if the Form 5500/1041 statute has expired. If the statute of limitations has already expired, the statute should be updated to alpha code "PP" in accordance with IRM 4.71.9.9(13).

    6. The decision of whether or not to examine related years must be documented in the case chronology.

    7. The group manager's concurrence to examine prior years must be documented either through a confirmation email or by signature in the case chronology.

    8. See IRM 4.71.1.14.1(12) for procedures to open an examination of a related Form 5500 that has been filed and IRM 4.71.1.21 for delinquent and substitute Form 5500 procedures.

  4. Initiate (at the discretion of the group manager) Form 1040 discrepancy adjustments (when there is a taxable event) on all or some plan participants or at a minimum those individuals with substantial tax impact, depending on workload considerations. See the discrepancy adjustment procedures in IRM 4.71.4.

    Note:

    Before initiating a discrepancy adjustment, secure an AMDISA print to determine if a Form 1040 exam is already in process.

  5. Initiate (at the discretion of the group manager) a Form 1120 discrepancy adjustment on the plan sponsor in accordance with the discrepancy adjustment procedures in IRM 4.71.4.

    Note:

    The agent may need to solicit the assistance of Small Business/Self-Employed (SB/SE) to generate the income tax adjustment on Form 4549-E, Income Tax Discrepancy Adjustments.

    Note:

    Normally, the agent mails out the 30-Day Letter (Letter 3605-A) for Forms 1040/1120 discrepancy adjustments. However, when a discrepancy adjustment is initiated in conjunction with (or because of) a proposed revocation/non-qualification, the agent prepares the adjustment (Form 4549-E) and all reports, but Mandatory Review mails Letter 3605-A with Form 4549-E and attachments to the taxpayer. The agent will work the discrepancy adjustment file(s) simultaneously with the proposed revocation/non-qualification and it will continue to be part of the proposed revocation/non-qualification package until the case is closed to Mandatory Review.

  6. Make timely referrals to the applicable Exam Functional Units (Large Business & International (LB&I), SB/SE or Wage & Investment (W&I) on Form 5666, TE/GE Referral Information Report,) if:

    1. The trustee does not file the solicited Forms 1041, or

    2. The agent does not initiate Forms 1040 or 1120 discrepancy adjustments.

      Note:

      See IRM 4.71.6 for referral procedures.

  7. Make a referral to Department of Labor (DOL) on Form 6212-B, Examination Referral Checksheet B, through EP Classification. Send the referral to:
    IRS
    EP Classification
    9350 Flair Drive, 4th Floor
    El Monte, California 91731-2885

    Note:

    If applicable, the agent should also make a referral to PBGC on Form 6533, Examination Referral Worksheet. See IRM 4.71.6 for referral procedures.

  8. Prepare the 30-Day Letter package for the "unagreed" Form 5500 examination in accordance with IRM 4.71.3.3.2.

  9. Prepare a final RAR in accordance with IRM 4.71.3.3.3. The agent will update the preliminary RAR that was mailed to the taxpayer (as discussed in paragraph 7 of IRM 4.71.3.2 above) for:

    1. Any necessary clarification to parts "a" through "d" (Issue, Facts, Law, or Government's Position)

    2. The taxpayer's response (if one is received) and

    3. The IRS’s rebuttal of the taxpayer’s response (if one was received).

  10. The agent will prepare the administrative record in accordance with IRM 4.71.3.3.4.

    Note:

    All cases subject to declaratory judgment (which includes "unagreed" Forms 5500 exams) will require the preparation of an administrative record and index to the administrative record.

  11. Complete Form 5650, EP Examined Closing Record, in accordance with IRM 4.71.3.3.6.

  12. Complete the Unagreed Plan Disqualification Checksheet before the case is closed to Mandatory Review. See IRM 4.71.3 Exhibit 1 at IRM 4.71 - Employee Plans Examination Exhibits for an example of the Unagreed Plan Disqualification Sheet.

  13. Assemble the paper case file in accordance with IRM 4.71.12.4.

  14. Prepare Form 5772, EP/EO Workpaper Summary, and Form 5773, EP/EO Workpaper Summary Continuation Sheet, (or its equivalent) to document examination procedures and findings and save them in the RCCMS Office Documents folder using the RCCMS Naming Convention. See IRM 4.71.3 Exhibit 2 at IRM 4.71 - Employee Plans Examination Exhibits for the RCCMS Naming Convention.

  15. Include current copies of the following Integrated Data Retrieval System (IDRS) prints in the case file:

    1. AMDISA prints for all cases under exam

    2. EMFOLT prints for all Forms 5500 examined

    3. IMFOLT prints for any Forms 1040 picked up as a result of the revocation (see IRM 4.71.3.3(4))

    4. BMFOLT prints for any Forms 1120 picked up as a result of the revocation (see IRM 4.71.3.3(5))

  16. Save the 30-Day Letter package and all forms and letters prepared during the examination in the RCCMS Office Documents folder (for the Lead Exam File) using the RCCMS Naming Convention.

  17. Complete the CECA checksheet in accordance with IRM 4.71.1.22.5.

    1. The group manager shall not mail an "electronic copy" of the checksheet to the CECA mailbox.

    2. The CECA checksheet will be saved in the RCCMS Office Documents folder.

    3. The Case Chronology Record (which was saved in RCCMS by the agent) shall be annotated by the group manager that the CECA checksheet was completed by the agent, reviewed by the manager and left within RCCMS for processing by Mandatory Review.

      Note:

      EP Mandatory Review will email the CECA checksheet to the CECA mailbox for all unagreed cases.

  18. The group will mail the hard copy case file to EP Mandatory Review at:

    IRS - EP Mandatory Review
    801 Broadway
    Room 397, MDP 13
    Nashville, TN 37203-3816

  19. Update the case to status 20 on AIMS and RCCMS and close the case to Mandatory Review.

4.71.3.3.1  (05-09-2014)
Solicitation of Form 1041

  1. In the event that an examination results in the proposed revocation/non-qualification of the tax exempt status of the trust and the issue could not be resolved under Audit CAP or a DO 8-3 closing agreement (as described in IRM 4.71.3.4 below), the trust becomes taxable and Forms 1041 are required to be filed for all open years.

    1. Forms 1041 are filed on a calendar year basis per IRC 644(a).

    2. The statute of limitations on the trust year runs with the filing of the Form 5500 for the plan year in which the trust year ends.

      Note:

      See IRM 4.71.9.6.1(9) for a detailed explanation.

    3. Forms 1041 should be solicited for trust years that correspond with plan years that are revoked or non-qualified, but have open statutes.

    4. In some instances these years may be short years. Example: Assume that the plan year being examined is the year ending June 30, 2012 and that the plan is being disqualified for the plan year ending June 30, 2012 and all subsequent years. The effective date of disqualification is July 1, 2011. Assume that on November 1, 2014, Forms 1041 are solicited. Forms 1041 should be solicited for the trust tax year beginning July 1, 2011 and ending December 31, 2011; the trust tax year beginning January 1, 2012 and ending December 31, 2012; and the trust tax year beginning January 1, 2013 and ending December 31, 2013.

    5. See IRC 443(b) for the required computation of taxable income for a taxable entity that is required to file a tax return for a short tax year.

    6. Form 1041 cannot be filed using the EIN of the plan sponsor. The trust must obtain its own EIN. See IRM 4.71.3.3.1.1 for instructions on how to obtain an EIN for the trust.

  2. If solicited Forms 1041 are received:

    1. Enter on the top margin in bold face print "FORM 5500 CONVERTED TO FORM 1041 BY TEGE:EP."

    2. Date stamp Form 1041 to establish the date actually received.

    3. Attach Form 3198-A, TE/GE Special Handling Notice, with the following items completed:
      • List your name, ID number, phone number, POD and group number in the "Required Entries" section.
      • List the trust EIN, return MFT (05), year of the attached Form 1041, taxpayer's name and name control in the "Required Entries" section.
      • List all years for the same taxpayer that are being processed simultaneously, with the applicable statute date.
      • Recommend the assessment or non-assessment of failure to pay and failure to file penalties in the "Other Instructions" section. Highlight the instruction regarding penalties on the form.

    4. Attach Form 13133, Expedite Processing Cycle, with the following completed:
      • List your name, phone number and mail code.
      • Check "Delinquent Return" .
      • Check "See attached Form 3198-A."
      • If penalties are not to be assessed, check "Penalties" and insert "Do not assess penalties" in the space provided.

    5. If payment is received, prepare Form 3244-A, Payment Posting Voucher, for each Form 1041 received. Complete these items with comments as noted:
      • EIN
      • Form number/MFT: Enter 1041/05.
      • Tax period
      • Plan number
      • Transaction date: Enter the date the payment was received.
      • Taxpayer name, date, address and zip code
      • Transaction Data: List the entire amount received for the year under transaction code 610 (Remittance With Return) and the same amount under "Total payment."
      • Remarks: List the check number and the amount of the check. If the payment is to be broken out over more than one year, list each year and the amount applied to each year.
      • Prepared by: Enter the agent’s name, group number and phone number.

    6. Make a copy of the Form 1041, Form 3198-A, Form 13133, the check and Form 3244-A (if applicable) for the case file.

    7. Prepare Form 3210, Document Transmittal:
      • List all Forms 1041 being forwarded.
      • If payment was received, list all check numbers and the amounts.

  3. Mail Form 1041 packages without remittance to:
    IRS
    1973 N. Rulon White Blvd.,
    Mail Stop 6052
    Ogden, UT 84404

  4. Mail Form 1041 packages with remittance less than $100,000 to:
    IRS
    Attn.: Teller Unit
    1973 N. Rulon White Blvd.,
    Mail Stop 1999
    Ogden, UT 84404

  5. Mail the Form 1041 package to Mail Stop 2003 instead of Mail Stop 1999 if remittance of $100,000 or more is received.

  6. When addressing the Express Services Routing slip (Form 9814), the recipient name should be "Mail Supervisor" with the recipient phone number of (801) 620-3750. This is the case whether or not payment is remitted.

  7. The receipt of a Form 1041 from the taxpayer does not make the case "agreed."

    1. The case must still be closed to Mandatory Review.

    2. The taxpayer must still be given the right to an Appeals hearing as well as their right to petition Tax Court.

    3. As far as the agent is concerned, the case is processed as though it were an "unagreed" revocation/non-qualification (except that it is not necessary to make a Form 1041 referral to SB/SE or LB&I).

    4. The agent must still prepare the 30-Day package (including the RAR) and the administrative record.

  8. If the trustee does not agree to complete and sign Form 1041, the agent must prepare Form 5666 for Form 1041 to be sent to SB/SE or LB&I (as applicable), since EP does not have examination jurisdiction over Forms 1041.

    1. The referral should be sent to EP Classification; however if SB/SE or LB&I is directly involved in the case, t send the referral directly to SB/SE (or LB&I ). If the referral is made directly to SB/SE (or LB&I), send a copy of the referral to EP Classification at the following address:
      IRS – EP Classification
      TE/GE Division, 4th Floor
      9350 Flair Drive
      El Monte, CA 91731-2885

    2. A copy of the RAR should be attached to the Form 5666 along with a rough calculation of Form 1041 tax due.

    3. Copies of all referral packages (Form 5666, the RAR and tax calculations) should be made for the case file and included as part of the workpapers.

      Note:

      Similar referrals should be made for Forms 1040 and 1120 if the agent does not make the discrepancy adjustments. These referrals should also include a copy of the RAR and an estimate of tax due.

  9. Forms 1041 should not be established on AIMS or RCCMS whether or not received from the taxpayer because EP does not have jurisdiction over Forms 1041. Time spent on the exam should be applied to Forms 5500 examined, or if discrepancy adjustments are initiated, to the discrepancy adjustment cases.

4.71.3.3.1.1  (05-09-2014)
Obtaining a Trust EIN

  1. When a Form 1041 is solicited for a plan that is being disqualified, the agent should request the trust EIN from the plan sponsor.

    Note:

    If the trust does not have an EIN, request that the plan sponsor complete Form SS-4, Application for Employer Identification Number (EIN), and file or fax it to the appropriate IRS office listed on the Form SS-4 instructions.

  2. If the plan sponsor provides a trust EIN, obtain a BMFOLI print to make sure the EIN is not being used to file returns other than trust returns.

    Note:

    A Form 1041 sent to Ogden with an EIN that is used for any purpose other than for the filing of Form 1041 or Form 990-T for the trust will not process at the Service Campus. The return will reject and a new trust EIN will have to be assigned causing a delay in the processing of the Form 1041.

  3. If the trust does not have an EIN and the plan sponsor will not obtain one but files Form(s) 1041, the agent must obtain one by faxing Form 4442 to the EO Entity Unit at Ogden Campus. The fax number is 801-620-6236. See IRM 4.71.3 Exhibit 10 at IRM 4.71 - Employee Plans Examination Exhibits for an example of a completed Form 4442.

  4. Obtaining a new EIN for the trust in a manner described in paragraph (3) will automatically establish an entity module. There is no need to prepare Form 2363, Master File Entity Change, or Form 4442, Inquiry Referral, to establish the entity.

4.71.3.3.2  (05-09-2014)
30-Day Letter Package

  1. The 30-Day Letter package for a proposed revocation/non-qualification consists of:

    1. Letter 1756 (for proposed revocation) or Letter 1758 (for proposed non-qualification)

    2. Pub 1, Your Rights as a Taxpayer, which will be generated by Mandatory Review

    3. Pub 594, The IRS Collection Process, which will be generated by Mandatory Review

    4. Pub 1020, Appeal Procedures EP Examinations, which will be generated by Mandatory Review

    5. Revenue Agent Report

    6. Return envelope

  2. The applicable 30-Day Letter (Letter 1756 or 1758) and the Revenue Agent Report (RAR) are to be prepared by the agent; however, these are only to be mailed by Mandatory Review Staff after the case is reviewed. The agent will leave the contact information blank in the upper right of the letter.

  3. The agent will include a paper copy of the 30-Day Letter package in the case file (as well as an electronic copy within RCCMS) in accordance with IRM 4.71.12.4.

  4. All prepared forms and letters should be named using the RCCMS Naming Convention and saved in the RCCMS Office Documents folder.

4.71.3.3.3  (05-09-2014)
Revenue Agent Report

  1. The qualification issue(s) should be fully explained in an RAR. Only items that are relevant to the issue(s) should be included in the RAR. The RAR should be broken down into the following components:

    1. Issues– Each separate issue will be clearly stated and numbered. For example, assume that during an examination of the plan year ending December 31, 2011, it was determined that a plan did not comply with the top-heavy minimum contributions requirements and did not make distributions to participants who separated from service in conformity with the top-heavy vesting schedule. Issue One would be: "Whether minimum contributions per IRC 416(c)(2) were made for a top-heavy plan for the plan year ending December 31, 2011." Issue Two would be: "Whether the accelerated vesting provisions under IRC 416(b) were applied to all plan participants or former participants who received distributions during the plan year ending December 31, 2011."

    2. Facts– The facts section of the RAR will include a brief history of the plan and provide pertinent details surrounding the qualification issue(s). This section should also cite any plan provisions relevant to the issues raised. For the top-heavy issues stated above, the plan sections dealing with top-heavy contributions and accelerated vesting should be described. Examples of information that would be included (as applicable to the issues) are:
      • The plan years under examination
      • Type of business of the plan sponsor
      • Date business started/incorporated
      • Ownership of business sponsoring the plan
      • Type of tax return filed by the plan sponsor and the tax year end
      • Effective date of plan
      • Type of plan
      • Latest determination letter
      • Number of plan participants
      • Plan participants affected
      • Contributions made to the plan for the years under examination
      • Specific applicable plan sections and
      • Other relevant case specific details.

    3. Law– The law section is where the authority for the qualification issue(s) is cited. An agent can cite the following sources that relate to the issue(s) raised as authority for the government’s position: the Internal Revenue Code (IRC), Temporary and Final Regulations, Revenue Rulings, Revenue Procedures, Court Decisions and Congressional Committee Reports.

      Note:

      Proposed Regulations can be referenced for interpretive purposes but cannot be cited as authority. Do not cite General Counsel Memos (GCMs), Private Letter Rulings (PLRs), or the Internal Revenue Manual (IRM) as sources of authority in the RAR.

    4. Government's Position– This section should discuss each issue separately and apply the law and the facts relevant to each specific issue. This section should also indicate the date on which the plan failed to qualify. An explanation of why EPCRS was not used must be provided. This section should be concluded by clearly stating the government’s position.

    5. Taxpayer's Position– This section should reflect the taxpayer's position including any rebuttals the taxpayer has made regarding the government's position. If the taxpayer has not provided a position on the issue(s), a simple statement to the effect that the taxpayer has not provided a response is sufficient.

    6. Rebuttal/Conclusion– If the taxpayer provides a position on the issue(s) during the exam or in response to the draft RAR, the RAR should contain a rebuttal to the taxpayer’s position when the case is closed to Mandatory Review. The government’s position should be restated as a conclusion in all cases.

  2. In general, do not include Forms 1040, 1120, or 5330 information in the RAR for the revocation/non-qualification because they involve separate legal entities.

    1. If the agent opens a discrepancy adjustment of a related Form 1040 and/or 1120 discrepancy adjustment, the agent must prepare a separate RAR(s) and a separate exam file(s).

    2. If the agent opens a Form 5330 exam, the agent must prepare a separate RAR and a separate exam file.

    3. This information should not be included in the administrative record.

  3. See IRM 4.71.3 Exhibit 3 at IRM 4.71 - Employee Plans Examination Exhibits for an example of a detailed RAR covering several possible qualification issues.

  4. The RAR should be named using the RCCMS Naming Convention and saved in the RCCMS Office Documents folder.

4.71.3.3.4  (05-09-2014)
Administrative Record

  1. The administrative record is the written record of the administrative proceedings between the IRS and the taxpayer in connection with a determination or examination.

    1. The administrative record will be used in Tax Court if the taxpayer files a petition to go to court (in response to the 90-Day Letter issued by Mandatory Review).

    2. Generally, the Court will decide a declaratory judgment solely on the basis of the administrative record.

  2. The agent must prepare an administrative record for all "unagreed" Form 5500 examination cases before the case is closed to Mandatory Review from the group.

  3. All information obtained or exchanged during the examination should be included in the administrative record.

  4. Information must be exchanged between the taxpayer and the IRS (or vice versa) before it can be included in the administrative record.

  5. If there is any doubt that a document has been exchanged, it should be mailed to the taxpayer with an individually designed cover letter.

  6. The documents included in the administrative record will be organized in a separate binder as follows:

    1. The EP Administrative Record Index will be the first page. See IRM 4.71.3 Exhibit 4 at IRM 4.71 - Employee Plans Examination Exhibits for the proper format of the EP Administrative Record Index.

    2. The "Description of Document" portion of the EP Administrative Record Index should contain a full description of the document, not just a form number or letter number.

    3. The EP Administrative Record Index will be prepared in a manner so that the subsequent reviewer may readily find any document, return, or correspondence contained in the file.

    4. All items that comprise the administrative record will be assembled in chronological order with the oldest item on top as number 1.

      Note:

      With regard to letters, the date reflected on the Administrative Record Index should be the date that appears on the letter. With regard to documents received with a letter, the Administrative Record Index should reflect the date that appears on the associated letter. With regard to documents received in person, the Administrative Record Index should reflect the date received.

    5. Tabs in the administrative record should be affixed to a blank cover sheet corresponding to the items in the Administrative Record Index. The tabs should not be permanently affixed to the original documents.

    6. A separate hard copy administrative file case folder will be included with the examination case file for all proposed "unagreed" and proposed "agreed" revocations/non-qualification cases.

    7. The administrative record will contain a copy of the plan and trust agreement for the period under examination and copies of all prior determination letters (if any). The administrative record will also contain a copy of any plan amendments adopted, subsequent to the period under examination. Additionally, a copy of any written correspondence (with attached documents) between the agent and the taxpayer/representative must also be included.

    8. In general, the administrative record does not include internal documents, such as interoffice memorandums, reviewer's memorandums, the agent's workpapers, the Case Chronology Record, or summaries of telephone conferences. Such internal documents should only be incorporated into the administrative record where the content/issue is specifically pertinent and has been shared in writing between the IRS and the taxpayer.

  7. Documents received from the taxpayer/representative should not be defaced in any manner (writing, highlighting, noting or scribbling, etc.). If the agent needs to write information on a document, a copy should be made for that purpose.

  8. It is important to note on documents received from the taxpayer, the date the document was received. The official "received date" stamp can be used for this purpose.

  9. Pertinent information that was discussed orally between the agent and the plan sponsor or representative should be included in the administrative record only if reduced to writing and exchanged with the plan sponsor or the representative.

  10. The agent will ensure that all attachments, which are referred to in the correspondence with the taxpayer, are included in the administrative record and are associated with the related document. This includes publications, notices, etc., that the agent attached to outgoing correspondence.

  11. Incorrect computations, misinterpretations of law (IRC, Regulations, Revenue Rulings, etc.) or incorrect conclusions made in writing to the taxpayer should be clarified in subsequent correspondence.

    1. Any information that has been provided to the taxpayer becomes a part of the administrative record; therefore, incorrect information that has been put in writing and sent to the taxpayer/representative should remain in the administrative record.

    2. To correct a mistake, the document should not be removed from the administrative record. Rather, the agent should admit that a mistake has been made and submit a corrected statement or revised calculation to the taxpayer/representative in writing.

  12. The EP Administrative Record Index should be named using the RCCMS Naming Convention and saved in the RCCMS Office Documents folder.

4.71.3.3.4.1  (05-09-2014)
Examples of Documents Included in the Administrative Record

  1. Copies of all pertinent information returns and tax returns.

    Note:

    If these were secured internally, make sure these are mailed to the taxpayer with an individually designed letter so that they can be included in the administrative record.

  2. All letters, documents and attachments exchanged with the plan sponsor by the agent relating to the examination.

  3. All letters and attachments received by mail from the plan sponsor/representative by the agent should be maintained intact.

  4. A copy of the plan document, the trust document, plan amendments and determination letters issued on the plan.

  5. A copy of Form 2848 or Form 8821, if applicable.

  6. Copies of employer records provided to the agent by the plan sponsor.
    Example: Payroll records may relate to the qualified status of the plan if an IRC 415 limit issue is involved in an examination.

  7. Copies of bank statements and cancelled checks provided to the agent by the plan sponsor during an examination.

  8. If, in response to the agent’s questions concerning qualification issues, the plan sponsor's written reply contains erroneous information, the agent should refute the misstatement in a formal, written response. Both letters should be included in the administrative record because the parties exchanged them and they affect a major qualification issue.

  9. Taxpayer’s request for technical advice, if applicable.

  10. Letters to the taxpayer from EP Technical regarding technical advice and all responses from the taxpayer, if applicable.

  11. The technical advice letter issued by EP Technical, if applicable.

  12. All Forms 4564, Information Document Requests, and responses to IDRs issued by mail or exchanged at the audit site.

4.71.3.3.5  (05-09-2014)
Statute Considerations

  1. Effective for the 2005 plan year for Form 5500-EZ filers, effective for the 2006 plan year for Form 5500 filers, effective for the 2009 plan year for 5500-SF filers, the normal statute of limitations date expires three years from the later of the due date of the Form 5500 series return or the date the Form 5500 series return was filed.

  2. A Statute Expiration Chart has been prepared to help determine the statute of limitations for Forms 1041. This should be completed and placed in the case file. See IRM 4.71.3 Exhibit 5 at IRM 4.71 - Employee Plans Examination Exhibits for the Form 1041 Statute Expiration Chart.

  3. See IRM 4.71.9 for Form 5500 statute of limitations procedures.

4.71.3.3.6  (05-09-2014)
Completion of Form 5650

  1. Form 5650, EP Examined Closing Record, is used to close examined Forms 5500.

  2. The following line items on Form 5650 should be completed as noted:

    1. P7-18: Enter the taxpayer’s EIN with a "P" .

    2. P21-22: Enter the MFT code.

    3. P24-29: Enter the tax period.

    4. P31-34: Enter the name control.

    5. P58-60: Enter the plan number.

    6. C: Enter the name of the taxpayer.

    7. Item 13: Leave item 13 blank on Form 5650, but use disposal code 601 in RCCMS.

    8. Item 14: Enter the statute expiration date whether or not the statute has been extended with Form 872-H.

    9. Item 28: Enter the agent’s time on the case.

    10. Item 30: Enter the examination technique code.
      • 1 for Office Interview Examination - Full Scope
      • 2 for Office Correspondence Examination – Full Scope
      • 4 for Field Examination – Full Scope
      • 5 for Office Interview Examination – Limited Scope/Focused Audit
      • 6 for Office Correspondence Examination – Limited Scope/Focused Audit
      • 7 for Field Examination - Limited Scope/Focused Audit

    11. Item 31: Enter the agent’s grade.

    12. Item 32: Enter the grade of the case.

    13. Item 33: Enter the agent’s last name, leave a space and then first initial.

    14. Item 40: Enter the project code. If there is none, enter 0000.

    15. Item 50: Enter the agent’s group number.

    16. Item 600: Enter 512 (revenue agent) or 987 (tax law specialist).

    17. Item 602: Enter excise tax picked up during the exam that is not reflected on Form 5599 of a related Form 5330 exam. Also insert the sanction amount of any closing agreement entered into (if a closing agreement involves more than one year, enter the amount in the earliest year only and $1 in the other years).

    18. Item 605: Enter the amount of proposed adjustments referred to Examination Functional Units.

    19. Item 606: Enter deductions claimed for contributions to the plan. Must be at least $1.

    20. Item 607: Enter total trust assets as of the end of the plan year. Must be at least $1.

    21. Item 608: Enter the number of participants that were directly affected by the exam (i.e., a change in account balance or vesting percentage). Must enter 0 if none are directly affected (cannot be left blank).

      Note:

      A participant is not considered directly affected merely because the plan could have been disqualified.

    22. Item 609: Enter plan type:
      • 1 for a defined benefit plan
      • 2 for a defined contribution plan

    23. Item 610: Enter the applicable three digit alphanumeric Issue Code(s) that relate to the Disposal Code. Issue Codes should relate to the issues found during the examination. Up to four Issue Codes can be entered. Any remaining spaces should be filled in with zeros. See Document 6476 for a list of Issue Codes.

    24. Item 612: Enter the applicable NAICS Code (see Document 6476).

    25. Item M: Enter "5500."

  3. See IRM 4.71.3 Exhibit 6 at IRM 4.71 - Employee Plans Examination Exhibits for an example of a completed Form 5650.

4.71.3.4  (05-09-2014)
Delegation Order 8-3 Procedures

  1. Under Delegation Order 8-3, which is found in IRM 1.2.47.4, TE/GE Directors have been delegated the authority to "enter into and approve a written agreement with any person relating to the Internal Revenue tax liability of such person (or of the person or estate for whom he or she acts) for a taxable period or periods ended prior to the date of agreement and related specific items affecting other taxable periods."

  2. DO 8-3 closing agreements are used to resolve issues that cannot be resolved through EPCRS.

  3. In most DO 8-3 closing agreements, the taxpayer(s) and the Commissioner formally agree that the plan under examination is not qualified, officially making the proposed revocation or proposed non-qualification an "agreed revocation" or "agreed non-qualification."

    1. The taxpayer is legally forgoing their right to an Appeals hearing and their right to petition the Tax Court.

    2. When a DO 8-3 closing agreement is fully executed by the taxpayer and the IRS, the case becomes an "agreed" case in every respect, just like a case resolved under EPCRS.

    Note:

    In very limited situations, excise tax and/or unrelated business income (UBI) issues may be resolved through a DO 8-3 closing agreement; however, pre-approval must be obtained from the Director, EP Examinations.

  4. As with EPCRS closing agreements, DO 8-3 closing agreements should be closely coordinated with the Area CAP Coordinator.

  5. In addition, if the case being examined is part of a special project with a coordinator, the closing agreement process will be coordinated with the Special Project Coordinator.

  6. EPCRS closing agreement procedures are followed with these exceptions:

    1. Special Project Coordinators (at the discretion of the Director, EP Examinations) may be involved in the approval process.

    2. The Director, EP Examinations signs the closing agreement for the IRS.

    3. The approval of the group manager, Area Manager, and in some cases the Director, EP Examinations must be secured prior to proposing a DO 8-3 agreement.

  7. Sample DO 8-3 closing agreements have been prepared and are included in Exhibits 7 and 8.

    1. See IRM 4.71.3 Exhibit 7 at IRM 4.71 - Employee Plans Examination Exhibits for an example of a standard DO 8-3 closing agreement covering failure to timely amend for GUST and EGTRRA.

    2. See IRM 4.71.3 Exhibit 8 at IRM 4.71 - Employee Plans Examination Exhibits for an example of an ATAT ESOP DO 8-3 closing agreement covering multiple qualification failures.

  8. As part of the approval process, a DO 8-3 Transmittal Checksheet will be prepared and signed by the following approving parties:

    1. The group manager

    2. The Area CAP Coordinator

    3. The Area Manager

    4. The Special Project Coordinator (if there is one) and

    5. The Director, EP Examinations

      Note:

      See IRM 4.71.3 Exhibit 9 at IRM 4.71 - Employee Plans Examination Exhibits for an example of the DO 8-3 Transmittal Checksheet.

  9. As a general rule, unless the calculation of the closing agreement sanction is specified within the closing agreement itself, closing agreements with sanction amounts that are greater than $250,000, must be secured with original signatures. If the sanction is specifically based on estimated tax, penalties and interest that would otherwise be due on tax returns filed by the taxpayer, and the tax amount is specifically spelled out in the closing agreement (as is the case with many DO 8-3 closing agreements), and the tax amount is $250,000 or less, the closing agreement may be received by fax even if the total sanction is greater than $250,000.

  10. The following letters will be used in the DO 8-3 process:

    1. Letter 1595A is used to mail closing agreements to the taxpayer/representative to formally sign the closing agreement.

    2. Letter 1595D is used to mail fully executed DO 8-3 closing agreements back to the taxpayer/representative.

    3. Letter 1745 is the closing letter for the 5500 exam when a DO 8-3 closing agreement is secured and the plan is determined to be disqualified from inception and remains disqualified.

      Note:

      Letter 1745-A should be used when the examination is being coordinated with SB/SE or LB&I.

  11. When an examination is resolved through a DO 8-3 closing agreement, the examination becomes "agreed" and is closed disposal code 15 on AIMS (disposal code 106 on RCCMS) although the plan is determined to be non-qualified under IRC 401(a).


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