Resolving IRS (and DOL) Penalties for Late Form 5500 Filing

Recently, a number of employers have received letters from the IRS assessing penalties ($25 per day) for the late filing of Form 5500 for the employer’s plan(s). The letters generate two important questions for the employer:

1- May the employer still ask the IRS to reduce or abate the penalty?

2- If the employer resolves the late filing with the IRS, will it preclude the DOL from imposing its penalties for late filing?

With respect to the first question, generally, the IRS has been inclined to at least reduce the penalty if the employer offers a reasonable explanation for its failure to timely file. However, there is no guidance that the employer will obtain relief. With respect to the second question, the DOL is not bound by any IRS reduction or abatement. Therefore, DOL still may assess its penalty. Accordingly, we recommend the following course of action.

If you receive a letter from the IRS assessing late filing penalties, you should (1) amend your Form 5500, (2) check box D on the amended Form 5500, and (3) attachment the following statement: “Form 5500, Box D – DFVC FILING.” Contemporaneous with filing an amended Form 5500, the employer should file under the Delinquent Filer Voluntary Compliance (DFVC) program. Under the program, the employer pays $10/day to a maximum of $750 ($2,000 for a large plan). Filing under the DFVC program (1) limits the DOL penalties, and (2) eliminates the IRS penalty. The IRS indicated in Notice 2002-23 that if an employer files under the DFVC program, the IRS will not impose its penalty. Neither the DOL nor the IRS precludes an employer from filing under the DFVC program because the IRS has contacted the employer. The DOL only precludes an employer from filing under the DFVC if the DOL contacts the employer in writing. After filing under the DFVC program, the employer should forward a copy of its DFVC filing to the IRS and request a cancellation of the penalty.

Of course, the best method for avoiding an IRS penalty letter is to resolve the late filing under the DFVC program. An employer with a late filing should not risk filing a late Form 5500, or filing a late Form 5500 with a request for abatement of the penalties without also filing under the DFVC program. The DOL has indicated that it generally does not intend to waive penalties for late filings. An employer that does not use the DFVC program risks paying substantially higher penalties. Therefore, an employer with a late filing should file under the DFVC program. For more information about how to file under DFVC, see the DOL’s web site at
http://www.dol.gov/ebsa/faqs/faq_dfvc.html

Source: http://www.relius.net/News/TechnicalUpdates.aspx?ID=212

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