This section provides a general explanation of the appeals process for excise taxes related to employee benefit plans.
A. Types of Excise Taxes Related to Employee Benefit Plans
An examination of an employee benefit plan may result in the revenue agent proposing any excise tax against the employer or a disqualified person. The proposed assessment can be made with or without an existing filed excise tax return (Form 5330, Return of Excise Taxes Related to Employee Benefit Plans (PDF)). Some examples of the types of excise taxes that relate to employee benefit plans include:
- A minimum funding deficiency (Section 4971).
- Nondeductible contributions to qualified plans (Section 4972).
- Excess contributions to a section 403(b)(7)(A) custodial account (Section 4973(a)(3)).
- A prohibited transaction (Section 4975).
- Excess fringe benefits (Section 4977).
- Certain ESOP dispositions (Sections 4978).
- Excess contributions to plans with cash or deferred arrangements (Section 4979).
- Certain prohibited allocations of qualified securities by an ESOP (Section 4979A).
- Reversions of qualified plan assets to employers (Section 4980).
- A failure to pay liquidity shortfall (Section 4971(f)).
- A failure of applicable plans reducing future benefit accruals to satisfy notice requirements (Section 4980F).
B. How Does the IRS Propose an Excise Tax Assessment?
The revenue agent will initially propose the assessment by Letter 2005 (PDF) or an individually designed letter. The letter will explain why the IRS believes an additional tax liability is necessary and will advise the taxpayer of their appeal rights when they do not agree with the results of the examination. The revenue agent could be proposing more than one type of excise tax in this letter. This letter will contain the following attachments:
Form 5438, Report of Examination - Excise Tax on Employee Plans, sets forth the amount of excise taxes involved and if warranted, delinquency penalties;
Revenue Agent Report (RAR), which is used to support our contention that taxes and penalties have accrued, (summary of the facts pertinent to the case with the applicable tax law);
Form 870, Waiver of Restrictions on Assessment and Collection of Deficiency in Tax and Acceptance of Overassessment (PDF), serves as a delinquent return in the event you decide not to protest the preliminary notice agreeing to the assessment;
Letter 2005 generally gives the taxpayer 30 days to respond and advises the taxpayer of their appeal rights if they do not agree. During the 30-day response period the taxpayer is free to present any documentation supporting the accuracy of the income tax return as filed or why an assessment should not be proposed. If no response is received within 30 days from the date of Letter 2005, the IRS will assume that the proposed assessment is correct.
If agreement can be reached in one or more issue, the taxpayer should notify the revenue agent the agreed upon issues so a revised examination report can be issued. A typical situation might be where the taxpayer agrees to the excise tax assessment but does not agree to the penalty associated with the excise tax assessment.
C. Available Avenues If You Disagree With the Proposed Assessment
Initial Request for Review with the Revenue Agent’s Manager:
If the taxpayer does not agree with the revenue agent’s finding, a meeting with the revenue agent's supervisor to discuss the findings may be requested. Although requesting a meeting with the manager is not required, it is a valuable option for the taxpayer and should be considered before moving forward with the remainder of the Appeals Process or Court.
If it is subsequently decided to have a meeting with the revenue agent’s manager, all the facts previously presented to the revenue agent should be presented again for reconsideration. If the manager concurs that the Form 5330 as previously filed accurately reflects the correct income tax or that the assessment is not warranted, then no adjustment will be proposed. If a prior Form 5330 has been filed, the revenue agent will issue Letter 2085 (PDF) acknowledging no change in the tax liability reported on the return(s). If there is further disagreement then the taxpayer is urged to appeal the case to an Appeals Office or directly to court.