7.11.8  EP Determinations Closing Agreement Program

Manual Transmittal

August 03, 2015

Purpose

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

Material Changes

(1) This IRM is updated to meet the requirements of P.L. 111-274 (H.R. 946), the Plain Writing Act of 2010. The Act provides that writing must be clear, concise, well-organized, and follow other best practices appropriate to the subject or field and intended audience.

(2) IRM 7.11.8.2, Processing a Closing Agreement, is renamed, Specialist’s Responsibilities for Processing a Closing Agreement.

(3) IRM 7.11.8.2.3, Preparing the Draft Closing Agreement, is updated to show that plan sponsors may pay sanctions on Pay.gov. New Pay.gov procedures include the specialist sends a Form 3244-A, Payment Posting Voucher - Examination to the plan sponsor with the Closing Agreement Cover Letter and the plan sponsor sends payment verification if Pay.gov is used.

(4) IRM 7.11.8.2.3, Preparing the Draft Closing Agreement, paragraphs 5 and 8, are updated to change the definition of "reasonable period" to "two weeks" .

(5) Exhibit 7.11.8-3, Closing Agreement Offer Letter, is updated for the new version which adds a 2 week response date to letter.

(6) Exhibit 7.11.8-5, Draft Closing Agreement Cover Letter, is updated for the new version which adds a 2 week response date to letter.

(7) Exhibit 7.11.8-7, Closing Agreement Cover Letter, is updated for the new version which adds a 2 week response date to letter.

Effect on Other Documents

This supersedes IRM 7.11.8, EP Determinations Closing Agreement Program dated March 7, 2014.

Audience

Tax Exempt and Government Entities
Employee Plans

Effective Date

(08-03-2015)

Robert S. Choi
Director, Employee Plans
Tax Exempt and Government Entities

7.11.8.1  (03-07-2014)
EP Determinations Closing Agreements Overview

  1. These procedures are for Employee Plans (EP) specialists who prepare closing agreements when they discover qualification failures during a determination letter (DL) application review.

  2. The EP Determinations Closing Agreement Program allows plan sponsors to bring their plan back into compliance after a qualification failure occurs.

  3. Two closing agreement coordinators manage the program and report to the Manager, EP Determinations Quality Assurance.

7.11.8.2  (08-03-2015)
Specialist’s Responsibilities for Processing a Closing Agreement

  1. A closing agreement constitutes an agreement between the Service and the plan sponsor that is binding with respect to the tax matters identified in the agreement for the periods specified. It allows plans to continue to maintain their tax favored status.

  2. The specialist’s responsibilities for processing a case using a closing agreement include:

    1. Prepare case for the closing agreement process.

    2. Determine the sanction amount and correction.

    3. Prepare the draft closing agreement.

    4. Prepare the case for closing.

    Note:

    The specialist may consult with his or her group manager and closing agreement coordinator during any of these steps.

  3. EP Determinations is divided into two areas. Each area has a closing agreement coordinator. Ask your group manager for your area’s coordinator.

7.11.8.2.1  (03-07-2014)
Preparing the Case for the Closing Agreement Process

  1. To determine if a case meets the requirements for a closing agreement, take these steps:

    1. Resolve any other issues not related to the closing agreement to completion before beginning the closing agreement.

    2. Ensure the issue involves a Qualification Failure, as described in Rev. Proc. 2013-12, section 5.

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

    4. Get approval from your group manager and, if appropriate, your coordinator to start the closing agreement.

    5. Complete the Plan Document Failure Worksheet and send in a secure email to the closing agreement coordinator with a cc to your group manager.

      Note:

      If the plan already received a Compliance Statement from the Voluntary Compliance Program (VCP) and you discover an additional defect, consult your manager and area closing agreement coordinator.

      Note:

      Do not list any personally identifiable information (PII) such as the plan sponsor or plan name in the email subject line.

      Note:

      You can find an example of the worksheet in Exhibit 7.11.8-2, Plan Document Failure Worksheet and a blank version on the shared server in the Closing Agree folder.

  2. If the issue is an Operational Failure, as described in Rev. Proc. 2013-12, section 5, that involves a year for which the statute of limitations has not expired, refer the issue to EP Examinations using the procedures in IRM 7.11.10, EP Examination and Fraud Referral Procedures.

  3. After you've received your manager's approval and consulted with your closing agreement coordinator, inform the plan sponsor of your findings and the potential need for a closing agreement.

    1. Either call the plan sponsor/Power of Attorney (POA) to describe the closing agreement program process or send them a Closing Agreement Offer Letter.

      Note:

      You can find an example of the letter in Exhibit 7.11.8-3, Closing Agreement Offer Letter and a blank version on the shared server in the Closing Agree folder.

    2. Explain to the plan sponsor/POA that before we can continue with the closing agreement process, the plan sponsor must agree, verbally or in writing, to enter into the EP Determinations Closing Agreement Program. If the plan sponsor verbally agrees to enter into a closing agreement, make note of the plan sponsor's agreement in the case file.

7.11.8.2.2  (03-07-2014)
Determining Sanction Amount and Correction

  1. To correct the failure:

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

    2. For all other cases, consult with your closing agreement coordinator for the appropriate correction. Refer to Rev. Proc. 2013-12, Appendices A and B, for some common correction methods.

  2. A sanction is imposed for qualification failures. This nonamender sanction schedule is in Rev. Proc. 2013-12, section 14.04. See Exhibit 7.11.8-1, Acronyms for Recent Laws for definitions.

    # of Participants Employer’s 2nd 5 or 6 year Remedial Amendment Cycle Employer’s 1st 5 or 6 year Remedial Amendment Cycle GUST/401(a)(9) Regs UCA/OBRA '93 TRA '86 T/D/R ERISA
    20 or fewer $2,500 $3,000 $3,500 $4,000 $4,500 $5,000 $5,500
    21-50 $5,000 $6,000 $7,000 $8,000 $9,000 $10,000 $11,000
    51-100 $7,500 $9,000 $10,500 $12,000 $13,500 $15,000 $16,500
    101-500 $12,500 $15,000 $17,500 $20,000 $22,500 $25,000 $27,500
    501-1,000 $17,500 $21,000 $24,500 $28,000 $31,500 $35,000 $38,500
    1,001-5,000 $25,000 $30,000 $35,000 $40,000 $45,000 $50,000 $55,000
    5,001-10,000 $32,500 $39,000 $45,500 $52,000 $58,500 $65,000 $71,500
    Over 10,000 $40,000 $48,000 $56,000 $64,000 $72,000 $80,000 $88,000

    Note:

    A plan that is a late or nonamender for a required interim amendment, as defined in Rev. Proc. 2007-44, section 5.02, will receive a 60% reduction of the listed sanction for the plan's Remedial Amendment Cycle (RAC) for the Cumulative List upon which the interim amendment appears if it is corrected by the end of that RAC.

  3. The sanctions are subject to the following:

    If: And: Then:
    a. the last favorable determination letter (LFDL) is contingent on the plan sponsor adopting a proposed amendment, the plan sponsor fails to adopt the amendment within 91 days but does adopt it within 180 days after the issuance of the LFDL, the sanction is $1,000, regardless of the number of participants.
    b. the LFDL is contingent on the plan sponsor adopting a proposed amendment, the plan sponsor did not adopt it or adopted it after 180 days, 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, we'll consider reducing the sanction if the tax exposure would be less than the sanction amount or the plan sponsor can prove undue financial hardship. Gather the facts and present them to the closing agreement coordinator to evaluate a sanction reduction.

  5. For failures other than nonamender failures, the sanction is based on the calculated maximum payment amount (MPA). To calculate the MPA, determine:

    1. The plan sponsor's Form 1120, U.S. Corporate Income Tax Return tax for all years for which the statute of limitations has not expired.

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

    3. The potential trust tax liability payable with Form 1041, U.S. Income Tax Return for Estates and Trusts for all years for which the statute of limitations has not expired.

      Note:

      You can find a tax estimation worksheet on the shared server in the "Closing Agree" folder.

  6. After you calculate the MPA, submit these to the closing agreement coordinator:

    1. The MPA calculations.

    2. A summary of the pertinent issues.

    3. Any mitigating factors submitted by the plan sponsor.

    4. Any corrective actions already taken by the plan sponsor.

  7. The closing agreement coordinator will give you a sanction range which you must negotiate with the plan sponsor.

7.11.8.2.3  (08-03-2015)
Preparing the Draft Closing Agreement

  1. Once you've reached an agreement on the sanction amount, prepare the draft closing agreement. State clearly the issue so as to lead to only one interpretation.

    Note:

    You can find sample draft closing agreements on the shared server in the "Closing Agree" folder. These samples are a starting point, but you must make a reasonable, good faith effort to fully prepare these documents.

  2. When the draft is complete, send a secure email to the closing agreement coordinator with a cc to your group manager with:

    1. The draft closing agreement.

    2. The draft operational compliance statement for any nonamender failure. (You can find an example in Exhibit 7.11.8-4, Example - Operational Compliance Statement and a blank version on the shared server in the "Closing Agree" folder.)

      Note:

      Don't include PII in the email subject line.

  3. The closing agreement coordinator will review these documents and either approve them or return them with any suggested changes.

  4. After the closing agreement coordinator approves the drafts, send them to the plan sponsor/POA with a Draft Closing Agreement Cover Letter. Any deviation from the draft closing agreement or operational compliance statement must be approved by the closing agreement coordinator.

    Note:

    You can find an example of the letter in Exhibit 7.11.8-5, Draft Closing Agreement Cover Letter and a blank version on the shared server in the "Closing Agree" folder.

  5. If the plan sponsor/POA doesn't respond to the Draft Closing Agreement Cover Letter within two weeks, send a Draft 10-day Letter with your manager's approval.

    Note:

    You can find an example of the letter in Exhibit 7.11.8-6, Draft 10-Day Letter and a blank version on the shared server in the "Closing Agree" folder.

  6. Once the plan sponsor/POA and closing agreement coordinator agree on the closing agreement's wording, document the case file to reflect the agreement and forward these to the plan sponsor/POA:

    1. Closing Agreement Cover Letter.

    2. Three copies of the final closing agreement.

    3. Operational compliance statement.

    4. Form 3244-A, Payment Posting Voucher - Examination (use version on the shared server in the "Closing Agree" folder because it has an explanation of the required items).

    Note:

    You can find an example of the Closing Agreement Cover Letter in Exhibit 7.11.8-7, Closing Agreement Cover Letter and a blank version on the shared server in the "Closing Agree" folder.

    Note:

    The return address on the cover letter must be the closing agreement coordinator's address. Explain to the plan sponsor/POA that they must return the three signed closing agreements, sanction (via a certified or cashier's check, or confirmation of payment through Pay.gov) and operational compliance statement to the closing agreement coordinator (address below) and not to the Covington, KY address or the specialist's address. This applies to all cases including cases completed on Tax Exempt Determination System (TEDS).
    IRS TE/GE - EP QAS
    c/o [Applicable Area Closing Agreement Coordinator]
    550 Main Street, Room 7008
    Cincinnati, OH 45202

  7. Prepare Letter 1595-F for the plan sponsor with a cc to all POAs authorized to receive correspondence and include the POA's complete address. Or, you may prepare separate letters for the plan sponsor and each POA. Send a secure email with Letter 1595-F to the closing agreement coordinator. Don't include PII in the subject line.

    Note:

    You can find an example of the Letter 1595-F in Exhibit 7.11.8-8, Letter 1595-F and a blank version on the shared server in the "Closing Agree" folder.

  8. Follow up with the closing agreement coordinator in two weeks to see if they have received the package. If the coordinator hasn't received the package, send a Closing Agreement 10-day Letter with your manager's approval.

    Note:

    You can find an example of the letter in Exhibit 7.11.8-9, Closing Agreement 10-day Letter and a blank version on the shared server in the "Closing Agree" folder.

7.11.8.2.4  (08-03-2015)
Preparing the Case for Closing

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

  2. The coordinator will:

    1. Fax or interoffice mail (depending on specialist's location) a copy of the signed closing agreement to TEDS or the specialist.

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

    3. Mail one of the original documents to the Deposit Unit at the Covington Campus, with the cashier's or certified check or the deposit ticket from Pay.gov.

    4. Mail the third original document to the plan sponsor for their records.

    5. Mail a duplicate copy to the POA for his records, if applicable.

  3. If the copy is faxed to TEDS, move it to the nondisclosable folder before closing the case. If the case is not in TEDS, put the copy on the left side of the case file.

  4. Upon receipt of the file copy, the case may be closed to your manager under the normal closing procedures.

7.11.8.3  (03-07-2014)
Miscellaneous Issues

  1. Contact the closing agreement coordinator if any of these situations occur because they could affect the issuing of a closing agreement:

    1. Withdrawal of a DL application.

    2. Request for relief under the Voluntary Correction Program (VCP). See IRM 7.11.1.18.1, Protecting VCP Eligibility.

    3. Discovery of additional plan failures.

  2. If the plan sponsor elects to withdraw its application instead of entering into a closing agreement, notify the closing agreement coordinator via secure email and follow the withdrawal procedures in IRM 7.11.1.20, Withdrawal of Applications.

    Note:

    Always add caveat 10 to the 2044 letter.

Exhibit 7.11.8-1 
Acronyms for Recent Laws

Acronym Definition of Acronym
The Employer’s 2nd 5 or 6 year RAC Includes all provisions on the 2010 through the 2014 Cumulative Lists.
The Employer’s 1st 5 or 6 year RAC Includes the Economic Growth and Tax Relief Reconciliation Act of 2001 (“EGTRRA”) and all provisions on the 2004 through the 2009 Cumulative Lists.
401(a)(9) Regs Final and temporary regulations under § 401(a)(9), 74 FR 18987, published on April 17, 2002
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 (CRA)
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) together (T/D/R)
ERISA Employee Retirement Income Security Act of 1974.

Exhibit 7.11.8-2 
Plan Document Failure Worksheet

CLOSING AGREEMENT
PLAN DOCUMENT FAILURE WORKSHEET
Specialist Name: Group No.:
SEID:
Phone No.: Fax No.:
Date the issue was discussed with the manager and received managerial approval to pursue a closing agreement:  
PLAN INFORMATION
 
1. Name of Sponsor/Employer:    
2. Address of Sponsor/Employer:    
3. Name of POA:    
4. Address of POA:    
5. Phone Number of POA:    
6. EIN of Sponsor/Employer:    
7. EDS Case Number:    
8. Name of Plan:    
9. Plan Number:    
10. Type of Plan:    
11. Plan Year End: / Tax Year End:    
12. Application Form Number:
(Check one)
   
13. Revocation Basis:
(select the applicable answer)
5300 5307 5310  
14. Total Maximum Amount
(or Amount per Fixed Fee Schedule):
Form Operational Both  
15. Number of Participants:    
Issue Summary (include all relevant facts and circumstances including any reduction to the Fixed Fee Schedule for interim amendments):  
   
 
 
Proposed Corrections:  
   
 
 

Exhibit 7.11.8-3 
Closing Agreement Offer Letter

Internal Revenue Service Department of the Treasury
   
Date: Person to Contact / ID number:
Response Due: Contact Telephone Number:


(Insert Address)
Plan Name and Number:
Refer Reply to:
   
Dear Sir or Madam:  
 During our review of a determination letter application filed for the above plan, we noted that your plan was not amended on or before the expiration of the applicable remedial amendment period under section 401(b) of the Internal Revenue Code (the Code) to comply with the provisions listed on the attachment.
 
 Since appropriate amendments were not adopted within the applicable remedial amendment period, your plan is no longer in compliance with the qualification requirements of section 401(a) of the Code. In order to avert disqualification of your plan, we are offering to enter into a closing agreement under section 7121 of the Code to resolve the failure to timely amend your plan for the items listed on the attachment. The closing agreement process will require you to: 1) execute triplicate copies of a closing agreement document which confirms that the Internal Revenue Service will treat your plan as timely amended for the provisions listed on the attachment; 2) pay a nonnegotiable cash sanction to the U.S. Treasury for the amount listed on the attachment; and 3) certify that the plan was operated in accordance with the provisions listed on the attachment for the period in which the form of the plan was not in compliance with these statutory and regulatory requirements.  
 If you have any questions, please contact the person whose name and telephone number are shown above.  
     
  Sincerely yours,  
  Employee Plans Specialist  
Enclosure: Attachment    
cc:    

Exhibit 7.11.8-4 
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

Exhibit 7.11.8-5 
Draft Closing Agreement Cover Letter

Internal Revenue Service Department of the Treasury
   
Date: Person to Contact / ID number:
Response Due: Contact Telephone Number:


(Insert Address)
Plan Name and Number:
  Refer Reply to:
   
Dear Sir or Madam:  
 Enclosed is the draft of the closing agreement and, if applicable, an operational compliance statement containing the terms and requirements previously discussed with you. If you agree that the drafts correctly reflect our discussions, please contact the Employee Plans Specialist at the above-listed telephone number. Copies will then be sent for your signature subject to compliance with terms stated therein.
 
 If you have any questions as to the draft, please contact the person whose name and telephone number are shown above to discuss.  
 Thank you for your cooperation.  
     
  Sincerely yours,  
  Employee Plans Specialist  
Enclosure:
Draft closing agreement
   
cc:    

Exhibit 7.11.8-6 
Draft 10-day Letter

Internal Revenue Service Department of the Treasury
   
Date: Person to Contact / ID number:
  Contact Telephone Number:
(Insert Address) Plan Name and Number:
Employer Identification Number:
Refer Reply to:
   
Dear Sir or Madam:  
 During our review of a determination letter application filed for the above plan, we noted that your plan was not timely amended to comply with the provisions listed on the attachment.
 
 Since appropriate amendments were not adopted within the applicable remedial amendment period, your plan is no longer in compliance with the qualification requirements of section 401(a) of the Code. In order to avert disqualification of your plan, we offered to enter into a closing agreement under section 7121 of the Code to resolve the failure to timely amend your plan for the items listed on the attachment. On MM-DD-YYYY, we sent you a draft of the closing agreement document and, if applicable, an operational compliance statement. You have not indicated approval of the draft closing agreement and, if applicable, operational compliance statement.  
 Please indicate whether or not you approve the documents within 10 days from the date of this letter so we may continue the closing agreement process. If we do not hear from you within that time, we may process your application based on the information you have already supplied us. This could result in a determination that your plan is not qualified for favorable tax treatment.  
 If you have any questions, please contact the person whose name and telephone number are shown above.  
     
  Sincerely yours,  
  Employee Plans Specialist  
Enclosure: Attachment    
cc:    

Exhibit 7.11.8-7 
Closing Agreement Cover Letter

Internal Revenue Service Department of the Treasury
   
Date: Person to Contact / ID number:
Response Due: Contact Telephone Number:
  Plan Name and Number:
(Insert Address) Employer Identification Number:
Mailing address for signed closing agreement package:
IRS, TE/GE, Employee Plans, Quality Assurance
Attn: (Insert Coordinators Name)
550 Main St., Room 7008
Cincinnati, OH 45202
   
Dear Sir or Madam:  
 Enclosed, in triplicate, is the closing agreement and, if applicable, an operational compliance statement, containing the terms and requirements previously discussed. Each party to the agreement should sign and date each copy of the closing agreements. The signature must be that of the named employer unless a Form 2848 has been submitted specifically conferring signatory authority for closing agreements. All corrective actions must be made prior to the execution of the closing agreement.
 
 Please submit the following items to the above mailing address:
 1. Sanction payment made payable to the U.S. Treasury by certified or cashier’s check(s) or by ACH transfer through Pay.gov; and,
 2. The signed closing agreement, in triplicate; and,
 3. The signed operational compliance statement, if applicable.
 
 If making payment by ACH transfer through Pay.gov, please see the enclosed 3244-A for additional instructions.  
 Failure to submit all items to the above address will result in significant delays in processing your closing agreement.  
 If you have any questions, please contact the Employee Plans Specialist at the above listed telephone number.  
     
  Sincerely yours,  
  Employee Plans Specialist  
Enclosure: Closing Agreements
3244-A
   
cc:    

Exhibit 7.11.8-8 
Letter 1595-F - Cover Letter for Closing Agreements

Internal Revenue Service Department of the Treasury
P. O. Box 2508
Cincinnati, OH 45201
   
Date: Person to Contact / ID number:
  Contact Telephone Number:
(Insert Address) Plan Year(s) beginning:
Name of Plan:
Plan Number:
Taxpayer Identification Number:
   
Dear Sir or Madam:  
 We have approved and signed the closing agreement you submitted pertaining to the qualification of the plan identified above for the period(s) shown. The enclosed copy of the agreement is for your records.
 
 Thank you for your cooperation.  
     
  Sincerely yours,  
  Manager, EP Determinations
Quality Assurance
 
Enclosure:
Copy of the closing agreement
   
cc:    

Exhibit 7.11.8-9 
Closing Agreement 10-day Letter

Internal Revenue Service Department of the Treasury
   
Date: Person to Contact / ID number:
  Contact Telephone Number:
  Plan Name and Number:
(Insert Address) Employer Identification Number:
Mailing address for signed closing agreement package:
IRS, TE/GE, Employee Plans, Quality Assurance
Attn: Select Coordinator
550 Main St., Room 7008
Cincinnati, OH 45202
   
Dear Sir or Madam:  
 During our review of a determination letter application filed for the above plan, we noted that your plan was not timely amended to comply with the provisions listed on the attachment.
 
 Since appropriate amendments were not adopted within the applicable remedial amendment period, your plan is no longer in compliance with the qualification requirements of section 401(a) of the Code. In order to avert disqualification of your plan, we offered to enter into a closing agreement under section 7121 of the Code to resolve the failure to timely amend your plan for the items listed on the attachment. On MM-DD-YYYY, we sent you triplicate copies of a closing agreement document and, if applicable, an operational compliance statement. You have not returned the executed triplicate copies of the closing agreement document, the required sanction and, if applicable, the executed operational compliance statement.  
 Please send the requested material within 10 days from the date of this letter so we may complete the closing agreement process. If we do not hear from you within that time, we may process your application based on the information you have already supplied us. This could result in a determination that your plan is not qualified for favorable tax treatment.  
 If you have any questions, please contact the person whose name and telephone number are shown above.  
     
  Sincerely yours,  
  Employee Plans Specialist  
Enclosure: Attachment    
cc:    

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