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7.11.8  EP Determinations Closing Agreement Program

Manual Transmittal

May 31, 2017

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) Updated IRM for the new Employee Plans Compliance Resolution System (EPCRS) Revenue Procedure. This includes:

  • Changed all references from Rev. Proc. 2013-12 to Rev. Proc. 2016-51.

  • Updated IRM 7.11.8.2.2, Determining Correction and Sanction Amount, for the new rules on determining the sanction amount.

  • Deleted Exhibit 7.11.8-1, Nonamender Sanction Schedule for Specific Laws and RACs and renumbered all subsequent exhibits.

  • Deleted Exhibit 7.11.8-2, Acronyms for Nonamender Sanction Schedule and renumbered all subsequent exhibits.

Effect on Other Documents

This supersedes IRM 7.11.8, EP Determinations Closing Agreement Program dated August 30, 2016.

Audience

Tax Exempt and Government Entities
Employee Plans

Effective Date

(05-31-2017)

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 the plan has a qualification failure.

  3. Two Closing Agreement Coordinators (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 IRS and the plan sponsor that:

    1. Is binding for the tax matters identified in the agreement for the periods specified.

    2. Allows plans to continue to maintain their tax favored status.

  2. Your responsibilities for processing a case using a closing agreement:

    1. Prepare case for the closing agreement process.

    2. Determine the correction and sanction amount.

    3. Prepare the draft closing agreement.

    4. Prepare the case for closing.

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

7.11.8.2.1  (08-30-2016)
Preparing the Case for the Closing Agreement Process

  1. To determine if a case meets the requirements for a closing agreement:

    1. Completely resolve any other issues not related to the closing agreement before you begin the closing agreement.

    2. Ensure the issue involves a Qualification Failure, as described in Rev. Proc. 2016-51, section 5.

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

    4. Get approval to start the closing agreement process from your manager and coordinator.

    5. Complete the Plan Document Failure Worksheet and secure email it to the coordinator with a cc to your manager. Find an example of the worksheet in Exhibit 7.11.8-1, Plan Document Failure Worksheet and a blank version on the shared server in the "Closing Agree" folder.

      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 coordinator.

      Note:

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

  2. If the issue is an Operational Failure, as described in Rev. Proc. 2016-51, section 5, that involves a year for which the statute of limitations is open, 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 coordinator, inform the plan sponsor of your findings and the potential need for a closing agreement.

    1. Call the plan sponsor/Power of Attorney (POA) to describe the closing agreement program process or send them a Closing Agreement Offer Letter. Find an example of the letter in Exhibit 7.11.8-2, 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  (05-31-2017)
Determining Correction and Sanction Amount

  1. To correct the failure:

    1. For nonamender cases, secure a corrective amendment (if the plan sponsor hasn’t already amended the plan).

    2. For all other cases, consult with your coordinator for the appropriate correction. Refer to Rev. Proc. 2016-51, Appendices A and B, for some common correction methods.

  2. The IRS imposes a sanction for qualification failures. The nonamender sanction schedule for sanctions negotiated and agreed to on or after January 1, 2017, is in Rev. Proc. 2016-51, section 14.04.

  3. Nonamender sanction amounts are generally not negotiable. However, we'll consider reducing the sanction if the:

    1. Tax liability from plan disqualification is less than the sanction amount.

    2. Plan sponsor can prove undue financial hardship.

    3. Plan amendment was timely adopted but is found not to satisfy the qualification requirements of the Code.

      Note:

      Gather the facts and present them to the coordinator to evaluate a sanction reduction.

      Note:

      In most cases, the sanction won’t be reduced to less than the VCP user fee applicable to the plan.

  4. We may increase the sanction for egregious nonamender failures. Factors include the:

    1. Number of plan amendments that were not timely adopted.

    2. Number of years that had elapsed from the end of the remedial amendment period until amendments were adopted (if at all).

    3. Extent to which the plan lacked internal controls to facilitate the timely adoption of amendments.

  5. For failures other than nonamender failures, the sanction is a negotiated amount and determined based on facts and circumstances. See Rev. Proc. 2016-51, section 14.01. Generally, the amount will not be less than the VCP user fee that applies to the plan. To determine all the facts and circumstances, you may need to calculate the maximum payment amount (MPA), which is the estimated potential tax liability on plan disqualification. With the coordinator’s help, calculate the MPA for all tax years open by statute based on the following returns:

    1. The plan sponsor's Form 1120, U.S. Corporate Income Tax Return or partnership or sole proprietor return.

    2. The participants’ Form 1040, U.S. Individual Income Tax Return.

    3. The potential trust tax liability payable with Form 1041, U.S. Income Tax Return for Estates and Trusts.

      Note:

      Find a MPA calculation worksheet on the shared server in the "Closing Agree" folder.

  6. After you calculate the MPA to the best of your ability, send the following to the coordinator:

    1. The MPA worksheet.

    2. Any mitigating factors submitted by the plan sponsor.

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

  7. The coordinator evaluates the information and gives you a sanction range which you must negotiate with the plan sponsor.

7.11.8.2.3  (08-30-2016)
Preparing the Draft Closing Agreement

  1. Once you've reached an agreement on the sanction amount, prepare the draft closing agreement with a "DRAFT" watermark. State the issue clearly so it leads to only one interpretation.

    Note:

    Find sample draft closing agreements on the shared server in the "Closing Agree" folder. These samples are a starting point. Make a reasonable, good faith effort to fully prepare these documents and customize them to your case.

  2. When you complete the draft, secure email these documents to the coordinator with a cc to your group manager:

    1. The draft closing agreement.

    2. The draft operational compliance statement for any nonamender failure. (Find an example in Exhibit 7.11.8-3, Example - Operational Compliance Statement and a blank version on the shared server in the "Closing Agree" folder.)

      Reminder:

      Don't include PII in the email subject line.

  3. The coordinator reviews these documents and either approves them or returns them with suggested changes.

  4. After the coordinator approves the drafts, send them to the plan sponsor/POA with a Draft Closing Agreement Cover Letter. Get the coordinator’s approval if you change any part of the draft closing agreement or operational compliance statement.

    Note:

    Find an example of the letter in Exhibit 7.11.8-4, 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:

    Find an example of the letter in Exhibit 7.11.8-5, Draft 10-Day Letter and a blank version on the shared server in the "Closing Agree" folder.

  6. Once the plan sponsor/POA and coordinator agree on the closing agreement's wording, make changes to the document, if applicable, and remove the draft watermark to create the final closing agreement. Send these to the plan sponsor/POA:

    1. Final Closing Agreement Cover Letter. Make sure you select the coordinator’s name which includes his/her return address - see IRM 7.11.8.2.3 (7).

      Note:

      The return address on the cover letter must be the coordinator's address.

    2. Three copies of the final closing agreement.

    3. Operational compliance statement.

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

    Note:

    Find an example of the Final Closing Agreement Cover Letter in Exhibit 7.11.8-6, Final Closing Agreement Cover Letter and a blank version on the shared server in the "Closing Agree" folder.

  7. 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 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).

    Exception:

    The signed closing agreements may be accepted by fax if the plan sponsor (or POA, if the Form 2848 authorizes the POA to sign the agreement) requests to do so by phone. Document the chronology record with the contact date and note that the plan sponsor/POA wishes to send the closing agreement by fax.


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

  8. 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. Secure email Letter 1595-F to the coordinator. Don't include PII in the subject line.

    Note:

    Find an example of the Letter 1595-F in Exhibit 7.11.8-7, Letter 1595-F and a blank version on the shared server in the "Closing Agree" folder.

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

    Note:

    Find an example of the letter in Exhibit 7.11.8-8, Closing Agreement 10-day Letter and a blank version on the shared server in the "Closing Agree" folder.

7.11.8.2.4  (08-30-2016)
Final Processing Steps for a Closing Agreement

  1. Manager, EP Determinations Quality Assurance: When the coordinator receives a complete and accurate closing agreement package, sign all three original closing agreements, the 1595-F letter(s), and initial Form 3210.

  2. Coordinator:

    1. Fax, email, 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 executed (original) closing agreements for your file.

    3. Mail an original closing agreement to the plan sponsor for their records.

    4. Make and mail a copy to the POA for his records, if applicable.

    5. Mail to the Deposit Unit at the Covington Campus:

      • The last original closing agreement

      • Cashier's or certified check or the deposit ticket from Pay.gov

      • Form 3210 original and a copy to be acknowledged and returned

      • Cover Memo

        Note:

        Find an example of the Cover Memo in Exhibit 7.11.8-9, Cover Memo and a blank version on the shared server in the "Closing Agree" folder.

      • Form 3244-A

      • Form 5734

    6. Keep a copy of the packet in IRM 7.11.8.2.4(2)(e) in EP Determinations Quality Assurance and add the signed acknowledged Form 3210 to verify the Campus received it.

  3. Specialist:

    • Make sure the copy of the Closing Agreement in TEDS is in the nondisclosable folder before you close the case. If the case isn’t in TEDS, put the copy on the left side of the case file.

    • After you receive the file copy, close the case under the normal closing procedures.

7.11.8.3  (03-07-2014)
Miscellaneous Issues

  1. Contact the coordinator if any of these situations occur because they could affect your issuing 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 coordinator via secure email and follow the withdrawal procedures in IRM 7.11.1.16, Withdrawal of Applications.

    Note:

    Always add caveat 10 to the 2044 letter.

Exhibit 7.11.8-1 
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 7.11.8-2 
Closing Agreement Offer 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) 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 7.11.8-3 
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 7.11.8-4 
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 7.11.8-5 
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 7.11.8-6 
Final 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: (Use drop down menu to select Coordinator’s 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 7.11.8-7 
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 7.11.8-8 
Closing Agreement 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:
  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:  

Exhibit 7.11.8-9 
Cover Memo

  DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
WASHINGTON, D.C. 20224
   
DATE:  
MEMORANDUM FOR: Cincinnati Submission Processing Center
Attn: XXXXX, Deposit Unit, Stop 31
201 W. Rivercenter Blvd.
Covington, KY 41011
   
FROM: XXXXX, Area X Closing Agreement Coordinator
Cincinnati Centralized Determinations Site
TE/GE Division, Employee Plans
   
SUBJECT: EP Closing Agreement under Audit Closing Agreement Program

Attached is a closing agreement as noted:

Payer’s Name:
Payer’s EIN:
Payer’s Address:

XXXXXXXXXXXXXXXXXXX Plan #xxx.

The closing agreement should be routed to the accounting branch for assessment and credit. The assessment should be made as a Non-Master File assessment, true tax class 6, abstract number 139. (Please refer to IRM 3(17)(46)5.5 for processing instructions.)

There are to be no refunds of monies under this closing agreement.

If you have any questions, please contact me at (513) 263-xxxx.

Thank You.

Attachment:


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