Part 7. Rulings and Agreements

Chapter 11. Employee Plans Determination Letter Program

Section 8. EP Determinations Closing Agreement Program

7.11.8  EP Determinations Closing Agreement Program

Manual Transmittal

January 10, 2012

Purpose

(1) This transmits revised IRM 7.11.8, Employee Plans Determination Letter Program, EP Determinations Closing Agreement Program.

Material Changes

(1) IRM 7.11.8.2.1, Preparing the Application for the Closing Agreement Process was modified to show that the Plan Document Failure Worksheet should be sent to the closing agreement program coordinator when the closing agreement is first considered instead of waiting for the proposed closing agreement to be prepared.

(2) IRM 7.11.8.2.5, Preparing the Application for Closing was updated to specify that the Deposit Unit at the Covington Campus receives an original copy of the executed closing agreement and that the specialist will receive a copy.

(3) Other minor editorial changes have been made throughout the text to meet IRM format specifications and improve readability.

Effect on Other Documents

This supersedes IRM 7.11.8, EP Determinations Closing Agreement Program, dated June 03, 2011.

Audience

Tax Exempt and Government Entities (TE/GE) Employee Plans Personnel

Effective Date

(01-10-2012)

Robert Choi
Director, Employee Plans
Tax Exempt and Government Entities

7.11.8.1  (01-10-2012)
EP Determinations Closing Agreements Overview

  1. These procedures are applicable to closing agreements written in conjunction with qualification defects discovered during an analysis of a determination letter application. The EP Determinations Closing Agreement Program is used to bring a plan with document failures back into compliance.

  2. These procedures provide guidance to EP specialists on the procedures for preparing a closing agreement signed by the Manager, EP Determinations Quality Assurance. EP specialists consult with a closing agreement coordinator when processing a closing agreement. EP closing agreement coordinators in EP Determinations are responsible for reviewing the operations of the program and report to the Manager, EP Determinations Quality Assurance.

  3. If, during the review of a determination letter application, a specialist finds a Qualification Failure as described in Rev. Proc. 2008-50, 2008-35 CB 464, the taxpayer has an opportunity to correct the failure(s). See IRM 7.2.2, Employee Plans Compliance Resolution System (EPCRS).

7.11.8.2  (01-10-2012)
Processing a Closing Agreement

  1. The steps involved in processing a closing agreement are as follows:

    1. Prepare case for the closing agreement process.

    2. Determine the sanction amount and correction.

    3. Prepare the draft closing agreement.

    4. Prepare the closing agreement for issuance.

    5. Prepare the case for closing.

  2. Most of these steps are handled by the specialist, in conjunction with their group manager and closing agreement coordinator.

  3. EP Determinations is divided into two graphic areas. Each area has a closing agreement coordinator. The specialist should consult with the group manager for assistance in locating the correct coordinator.

7.11.8.2.1  (01-10-2012)
Preparing the Case for the Closing Agreement Process

  1. When determining whether a case meets the requirements for a closing agreement, take the following steps:

    1. Address all other issues to completion before preparing the closing agreement.

    2. Ensure the issue involves a Qualification Failure, as described in Rev. Proc. 2008-50.

    3. Fully research and develop all issues subject to the proposed closing agreement.

    4. Consult with group manager and, if necessary, the area closing agreement coordinator for the determinations group to determine if closing agreement is necessary.

    5. Complete and e-mail a Plan Document Failure Worksheet to the closing agreement coordinator with a carbon copy to group manager. Use secure messaging when sending by e-mail.

      Note:

      Blank Plan Document Failure Worksheets are available on the shared server in the folder labelled "Closing Agree."

  2. If the issue is an Operational Failure, as defined in Rev. Proc. 2008-50 that involves a year for which the statue of limitations has not expired, a referral to EP Examinations is required. The specialist will complete a Form 5666, TE/GE Referral Information Report and forward the referral to the EP Classifications Unit at the following address:

    Internal Revenue Service
    EP Classification Unit
    9350 Flair Drive, 2nd Floor
    El Monte, CA 91731-2828

  3. After receiving managerial approval and consulting with the closing agreement coordinator, the specialist must inform the taxpayer of the findings and the potential need for a closing agreement.

    1. Contact the taxpayer or Power of Attorney (POA) via telephone or letter to describe the process.

    2. Explain that to start the process, the taxpayer must agree in writing to enter the Closing Agreement Program.

7.11.8.2.2  (01-10-2012)
Determining Sanction Amount and Correction

  1. The specialist must take the following actions when determining the sanction amount and correction:

    1. For nonamender cases, secure a corrective amendment (if the taxpayer has not already amended the plan).

    2. For all other cases, consult the closing agreement coordinator for the respective area regarding the appropriate correction method. Refer to the EPCRS revenue procedure, Rev. Proc. 2008-50, for some common correction methods in Appendices A and B.

  2. A sanction is imposed for nonamender failures. See section 14.04 of Rev. Proc. 2008-50, for the sanction schedule, listed in the table below. See Exhibit 7.11.8-1, Acronyms for Recent Laws for definitions.

    # of Participants EGTRRA/subsequent legislation GUST/401(a)(9) Regs UCA/OBRA '93 TRA '86 T/D/R ERISA
    20 or less $2,500 $3,000 $3,500 $4,000 $4,500 $5,000
    21-50 $5,000 $6,000 $7,000 $8,000 $9,000 $10,000
    51-100 $7,500 $9,000 $10,500 $12,000 $13,500 $15,000
    101-500 $12,500 $15,000 $17,500 $20,000 $22,500 $25,000
    501-1,000 $17,500 $21,000 $24,500 $28,000 $31,500 $35,000
    1,001-5,000 $25,000 $30,000 $35,000 $40,000 $45,000 $50,000
    5,001-10,000 $32,500 $39,000 $45,500 $52,000 $58,500 $65,000
    Over 10,000 $40,000 $48,000 $56,000 $64,000 $72,000 $80,000

    Note:

    Nonamender cases involving GAR and/or the final regulations under IRC 401(a)(9) will receive a sanction of 40% of the listed GUST/401(a)(9) sanction. All other interim amendments, as defined in section 5.02 of Rev. Proc. 2007-44, 2007-28 CB 54, will be subject to a sanction equal to 40% of the EGTRRA sanction listed above.

  3. The sanctions listed in the table above are subject to the following caveats:

    IF AND THEN
    a. the last favorable determination letter (LFDL) is contingent on the taxpayer adopting a proposed amendment, the taxpayer fails to adopt the amendment within 91 days after the issuance of the LFDL, they are deemed to be a nonamender.
    b. the failure involves a proposed amendment caveated on the LFDL, which is adopted after 91 days but prior to 180 days, the sanction will be $1,000, regardless of the number of participants.
    c. the proposed amendment is adopted after 180 days from the issuance of the LFDL,   consult with the closing agreement coordinator to determine the proper sanction amount.

  4. For nonamender failures, the sanction amounts are not cumulative (use only the highest amount on the sanction schedule). Nonamender sanction amounts are generally not negotiable. However, if the tax exposure is less than the sanction amount or the taxpayer can prove undue financial hardship, reduction of the sanction will be considered. The specialist should gather the facts and present them to the closing agreement coordinator for a sanction reduction evaluation.

  5. For failures other than nonamender failures, the sanction will be based upon the calculated maximum payment amount (MPA). To calculate the MPA, the specialist will need to determine:

    1. Which tax years have an open statute of limitations.

    2. The taxpayer's Form 1120, U.S. Corporate Income Tax Return tax exposure for all years for which the statue of limitations has not expired.

    3. The highly compensated employees (HCE's)Form 1040, U.S. Individual Income Tax Return tax exposure for all years for which the statue of limitations has not expired.

    4. The potential liability to the trust if taxes are payable with the Form 1041, U.S. Income Tax Return for Estates and Trusts for all years for which the statue of limitations has not expired.

      Note:

      A tax estimation worksheet is located on the shared server in the folder labelled "Closing Agree."

  6. After calculating the MPA, the specialist will submit the following to the closing agreement coordinator:

    1. The MPA calculations.

    2. A summary of the pertinent issues.

    3. Any mitigating factors submitted by the taxpayer.

    4. Any corrective actions already taken by the taxpayer.

  7. The closing agreement coordinator will provide the specialist with a sanction range. The specialist is responsible for the sanction negotiation.

7.11.8.2.3  (01-10-2012)
Preparing the Draft Closing Agreement

  1. Once an agreement on the sanction amount has been reached, the specialist must prepare the draft closing agreement. When preparing the closing agreement, clearly state the issue so as to lead to only one interpretation.

    Note:

    Sample draft closing agreements are available on the shared server in the folder labelled "Closing Agree." These templates may be used as a starting point. The specialist must make a reasonable, good faith effort to fully prepare these documents.

  2. When the draft is complete, the specialist must e-mail the following documents to the closing agreement coordinator with manager carbon copied (cc):

    1. The draft closing agreement.

    2. The draft operational compliance statement for any issue involving an untimely amendment. (See example located in Exhibit 7.11.8-2, Example - Operational Compliance Statement. Other examples are located on the shared server).

      Note:

      The subject line of the e-mail should NOT contain any personal identifiable information (PII) such as the taxpayer or plan name. Send all e-mails by secure messaging.

  3. The closing agreement coordinator will review the draft closing agreement and return to the specialist with suggested changes, if necessary.

  4. The specialist will then send the draft to the taxpayer/POA. Any deviation from the draft agreement must be approved by the closing agreement coordinator.

  5. Once the draft has been accepted, by the coordinator for the respective area, the specialist will forward the following to the taxpayer/POA:

    1. Final CA Cover Letter.

    2. Three copies of the final closing agreement.

    3. Statement of operational compliance.

    Note:

    A sample Final CA Cover Letter can be found on the shared server in the folder labelled "Closing Agree" . The return address for the cover letter must be the direct address of the specialist (this applies to all cases including cases completed on Tax Exempt Determination System (TEDS)).

7.11.8.2.4  (01-10-2012)
Preparing the Closing Agreement for Issuance

  1. The specialist must secure and/or prepare the following for final submission to the closing agreement coordinator:

    1. Three signed copies of the closing agreement. The POA may not sign the closing agreement unless there is a Form 2848, Power of Attorney and Declaration of Representative, on file specifically authorizing this action.

    2. A certified or cashier’s check made payable to the United States Treasury (the check may not be a personal or corporate check).

    3. Signed statement of operational compliance.

    4. Form 3210, Document Transmittal.

  2. The specialist must send the items listed under paragraph (1) to the closing agreement coordinator at the following address:

    IRS TE/GE - EP QAS
    c/o [Applicable Area Closing Agreement Coordinator]
    550 Main Street Room 7008
    Cincinnati, OH 45202

  3. The specialist must prepare a draft Letter 1595 addressed to the taxpayer with a cc: to the POA, including the POA's complete address or prepare separate letters to the taxpayer and the POA. E-mail the draft Letter 1595 via secure e-mail to the coordinator ensuring PII is not on the subject line. This will also notify the coordinator that a check is being sent.

7.11.8.2.5  (01-10-2012)
Preparing the Case for Closing

  1. Once a complete and accurate CA package has been submitted to the coordinator, the Manager, EP Determinations Quality Assurance, will sign all three original closing agreements.

  2. EP Determinations Quality Assurance staff will take the following steps:

    1. Make one copy of the agreement and provide it to the specialist to be placed on the left (non-disclosable) side of the folder. (If the specialist is located in Cincinnati, the executed closing agreement will be hand delivered. If the specialist is located in a post of duty other then Cincinnati, it will be mailed.)

    2. Keep one of the fully executed (original) closing agreement for their files.

    3. Mail one of the original documents to the Deposit Unit at the Covington Campus, with the cashier or certified check.

    4. Mail the third original document to the Taxpayer/POA for their records.

  3. Upon receipt of the file copy, the specialist may continue to process the case under the normal procedures.

7.11.8.3  (01-10-2012)
Miscellaneous Issues

  1. The following situations may affect the issuance of a closing agreement:

    1. Withdrawal of a determination letter request.

    2. Request for relief under the Voluntary Correction Program (VCP).

    3. Discovery of additional plan failures.

  2. If the taxpayer elects to withdraw its determination application instead of entering into a closing agreement, the specialist should follow the withdrawal procedures in IRM 7.11.1.20, Withdrawal of Applications.

    Note:

    Be sure to add caveat 10 to the 2044 letter.

  3. Taxpayers may protect their eligibility to enter into the Voluntary Correction Program (VCP) through the disclosure of an issue in their determination letter application. In order to make the disclosure effective, the taxpayer should submit a cover letter containing specific details regarding the relief sought.

  4. If the specialist discovers additional qualification failures for a plan that received a Compliance Statement under the Voluntary Compliance Program, the specialist must:

    1. Secure managerial approval and contact their closing agreement coordinator before continuing.

    2. Verify that the taxpayer is willing to correct the additional issue. (Possible sanctions are not discussed at this time. )

    3. Prepare and forward the document failure worksheet to the closing agreement coordinator. Clearly indicate that the case involves an additional failure not addressed in the VCP Compliance Statement. Also explain why the issue was not identified in the VCP submission.

    4. Provide a copy of the Compliance Statement and if applicable, Form 2848, Power of Attorney and Declaration of Representative.

      Note:

      The closing agreement coordinator will coordinate with VC to address the additional failure.

Exhibit 7.11.8-1 
Acronyms for Recent Laws

Acronym Definition of Acronym
EGTRRA Economic Growth &Tax Relief Reconciliation Act of 2001
GUST Uruguay Round Amendments Act (GATT), Uniformed Services Employment and Reemployment Rights Act of 1994 (USERRA), Small Business Job Protection Act (SBJPA), Taxpayer Relief Act of 1997 (TRA '97), Internal Revenue Service Restructuring and Reform Act of 1998, and Community Renewal Relief Act of 2000
GAR 1994 Group Annuity Reserving Table
UCA/OBRA '93 Unemployment Compensation Act of 1992 / Omnibus Budget Reconciliation Act of 1993
TRA '86 Tax Reform Act of 1986
T/D/R Tax Equity and Fiscal Responsibility Act of 1983 (TEFRA)/ Deficit Reduction Act of 1984 (DEFRA)/ Retirement Equity Act of 1984 (REA)
ERISA Employee Retirement Income Security Act of 1974.

Exhibit 7.11.8-2 
Example - Operational Compliance Statement

“The [Profit Sharing/Defined Benefit/Money Purchase/Cash Balance] Plan of [Employer Z] was operated in compliance with the requirements of the final and temporary regulations under section 401(a)(9) of the Code relating to minimum required distributions for the period January 1, ---------, 2003 (or first day of 2003 plan year if operating on fiscal year) -(enter date of adoption of 401(a)(9) amendment).]
___________________________________________
Employer Date

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