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Part 7. Rulings and Agreements

Chapter 2. TE/GE Closing Agreements

Section 2. Employee Plans Compliance Resolution System (EPCRS)

7.2.2  Employee Plans Compliance Resolution System (EPCRS)

7.2.2.1  (03-01-2002)
Overview

  1. The IRS, under the jurisdiction of the Commissioner, Tax Exempt and Government Entities Division (TE/GE), has instituted a comprehensive system of correction programs for retirement plans that are intended to satisfy the requirements of IRC sections 401(a) and 403(a), and for plans that are intended to satisfy the requirements of IRC sections 403(b) (403(b) plans) and IRC section 408(k) Simplified Employee Pension Plan ( "SEP" ) but that have not met applicable Internal Revenue Code requirements for a period of time. This coordinated system of correction programs is referred to as the Employee Plans Compliance Resolution System ( "EPCRS" ) and is set forth in Rev.Proc. 2001-17, 2001-7 I.R.B. 589.

  2. The three components comprising EPCRS include the:

    • Self Correction Program

    • Voluntary Correction Program

    • Audit Closing Agreement Program

  3. This section sets forth procedures relating to the correction programs comprising EPCRS. References to "specialist" under this section apply to tax law specialists and/or Internal Revenue agents.

7.2.2.1.1  (03-01-2002)
Effect of EPCRS; Reliance

  1. If the eligibility requirements of a correction program are satisfied and the sponsor or employer corrects a failure in accordance with the principles set forth under EPCRS, the IRS will not, on account of the corrected failure, pursue disqualification of a 401(a) or 403(a) plan, or, in the case of a 403(b) plan or a SEP, pursue income inclusion for affected participants, or liability for income tax withholding.

    Note:

    The term SEP also includes a salary reduction SEP ( "SARSEP" ) described in IRC section 408(k)(6).

  2. Taxpayers may rely on the relief prescribed under EPCRS.

7.2.2.2  (03-01-2002)
Types of Failures

  1. The failures eligible for correction under EPCRS are defined in Rev. Proc. 2001-17, section 5.

  2. In the case of a plan intended to satisfy IRC section 401(a) or IRC section 403(a) there are four types of Qualification Failures:

    1. Plan Document Failure — means a plan provision (or absence of a plan provision) that, on its face violates the requirements of IRC section 401(a) or IRC section 403(a).

    2. Operational Failure — means a failure that arises solely from the failure to follow plan provisions.

    3. Demographic Failure — means a failure to satisfy the requirements of IRC sections 401(a)(4), 401(a)(26), or 410(b).

    4. Employer Eligibility Failure — means the adoption of a cash or deferred arrangement for one or more years between 1987 and 1996 by an employer that was a tax-exempt organization prohibited from adopting a 401(k) plan during that period.

  3. In the case of a 403(b) plan, there are three types of 403(b) Failures:

    1. Operational Failure — means a failure to satisfy the requirements of IRC sections 403(b)(12), 403(b)(7), 403(b)(11), 403(b)(10), 401(a)(31), or any failure to satisfy the requirements under IRC section 403(b) that results in the loss of section 403(b) status.

    2. Demographic Failure — means a failure to satisfy the requirements of IRC sections 401(a)(4), 401(a)(26), or 410(b) as applied to 403(b) plans.

    3. Employer Eligibility Failure — means the adoption of a 403(b) plan by an employer that is not a tax-exempt organization described in IRC section 501(c)(3) or a public educational organization described in IRC section 170(b)(1)(A)(ii). In addition, a failure to satisfy the nontransferability requirement of IRC section 401(g); a failure to establish or maintain a custodial account as described in IRC section 403(b)(7); or a failure to purchase an annuity contract or a custodial account are Employer Eligibility Failures.

  4. In the case of a SEP, a failure to satisfy IRC section 408(k).

7.2.2.2.1  (03-01-2002)
EPCRS Programs

  1. The Self Correction Program ( "SCP" ) enables a sponsor of a qualified plan or an employer that offers a 403(b) plan or SEP to self-correct Operational Failures it discovers in its plan. As long as the eligibility requirements of SCP are satisfied, a sponsor of a qualified plan that has a favorable letter or an employer that offers a 403(b) plan, may self-correct any Operational Failure, even if significant, within, generally, two years from the year in which the failure occurs. (A SEP is not eligible for self-correction of significant failures.) In any event, insignificant failures may be corrected after the two year correction period, even if the plan or plan sponsor is under examination. See Rev. Proc. 2001-17, sections 4, 8, and 9 for provisions relating specifically to SCP.

  2. The Voluntary Correction Program ( "VCP" ) enables a sponsor of a qualified plan or an employer that offers a 403(b) plan or a SEP to voluntarily disclose to the IRS failures it has discovered in its plan, the proposed method of correcting the failures (including proposed modifications to administrative procedures, if any) and to pay a compliance fee. The IRS issues a compliance statement with respect to the plan, which sets forth the failures identified by the plan sponsor and the correction methods and administrative procedures approved by the IRS. See Rev. Proc. 2001-17, sections 4, 10, 11, and 12 for provisions relating specifically to VCP.

    1. VCP general procedures for qualified plans apply to all Plan Document Failures, Operational Failures, Demographic Failures and Employer Eligibility Failures.

    2. VCP has special procedures for qualified plans for submissions involving Operational Failures (Voluntary Correction of Operational Failures ( "VCO" )), and for certain submissions in which limited Operational Failures are being corrected using standardized methods of correction (Voluntary Correction of Operational Failures Standardized ( "VCS" )).

    3. VCP includes a special procedure for 403(b) plans (Voluntary Correction of Tax-sheltered Annuity Failures ( "VCT" )), a special procedure for group submissions (Voluntary Correction of Group Failures ( "VCGroup" )), and a special procedure that applies to SEPs (Voluntary Correction of SEP Failures ( "VCSEP" )).

    4. VCP also has a special procedure for qualified plans and 403(b) plans for anonymous submissions ( "Anonymous Submission Procedure" ).

  3. The Audit Closing Agreement Program ( "Audit CAP" ) is a program established in the Area offices that is available to a qualified plan, 403(b) plan or SEP that is under examination as defined in section 5 of Rev. Proc. 2001-17. Under Audit CAP, the plan sponsor pays a monetary sanction that is a negotiated percentage of the maximum payment amount. The maximum payment amount approximates the amount of tax the IRS could collect as a result of the disqualification of the plan. See Rev. Proc. 2001-17, sections 4, 13, and 14 for provisions relating specifically to Audit CAP.

7.2.2.3  (03-01-2002)
VCP Submissions

  1. VCP submissions must satisfy the submission requirements of Rev. Proc 2001-17, section 11. In general, a request under VCP consists of a letter from the plan sponsor (or plan sponsor’s representative) to the IRS that contains a description of the failures, a description of the proposed methods of correction (including proposed modifications to administrative procedures, if any), and other procedural items and includes supporting information and documentation.

  2. The compliance fee for a VCP submission is determined under Rev. Proc. 2001-17, section 12.04. The compliance fee is due:

    1. Except for the submissions listed in b. below, the compliance fee is due at the time the compliance statement is signed by the plan sponsor and returned to the Service. See IRM 7.2.2.4.5 for a description of compliance statement.

    2. In the case of a VCO or VCS submission, the compliance fee must be included with the submission. In the case of a submission made under the Anonymous Submission procedure, VCGroup, or VCSEP procedures, an initial fee must be included with the submission (and any additional fee is due at the time the compliance statement is signed by the plan sponsor and returned to the Service). See Rev. Proc. 2001-17, sections 12.06 and 12.07. See IRM 7.2.2.4.1 for the address to which the fees, including initial fees are transmitted.

  3. VCP submissions under VCO, VCS (and any VCO/VCS submissions under the Anonymous Submission procedure), VCGroup, and VCSEP are sent to:

    IRS
    Attention: T:EP:RA:VC
    P.O. Box 27063
    McPherson Station
    Washington, D.C. 20038

  4. VCP general procedure submissions and VCT submissions (including VCP general procedure and VCT submissions under the Anonymous Submission procedure) are sent to the Area office with jurisdiction over the state where the plan sponsor is located. See Rev. Proc. 2001-17, section 11.12.

7.2.2.4  (03-01-2002)
Procedures for Processing VCP Submissions

  1. The VCP submission processing procedures consist of four stages, as follows:

    • Controlling

    • Screening

    • Assigning/Reviewing

    • Closing

7.2.2.4.1  (03-01-2002)
Controlling VCP Submissions

  1. VCP submissions will be issued a control number and the compliance fee submitted with the case will be processed in accordance with established procedures.

  2. All VCP submissions are researched on AIMS to ascertain whether the plan is under examination. If the plan or plan sponsor is under examination, VCP is not available.

  3. For VCP submissions received under the Anonymous Submission procedure, the Area office transmits the check received with the submission using the following forms:

    1. Form 9814 Express Services Routing
      http://publish.no.irs.gov/FORMS/INTERNAL/PDF/22023J00.PDF;

    2. Form 3210 Document Transmittal,
      http://publish.no.irs.gov/FORMS/INTERNAL/PDF/22150G90.PDF. (In lieu of the plan sponsor’s name and EIN, the case control number should be entered on the Form 3210.);

    3. Form 3244 Payment Posting Voucher
      http://publish.no.irs.gov/FORMS/INTERNAL/PDF/22215A91.PDF; and

    4. Form 5734 Non-Master File Assessment Voucher (Not available electronically. See IRS Forms web site for contacts.)

      Note:

      The case control number and tax period must be entered on both Form 3244 and Form 5734.

  4. The transmittal package accompanied by a memo is sent by overnight mail using Form 9814 to:

    IRS
    Attention: Kyle Boster
    Mail Stop 6059
    SP:P:RC:P:D30
    1160 W 1200 S
    Ogden, Utah 84201

  5. If the VCP submission includes an application for a determination letter, see IRM 7.2.2.5.

7.2.2.4.2  (03-01-2002)
Screening VCP Submissions

  1. VCP submissions, including an application for a determination letter, will be screened for completeness. If the VCP submission is not complete, the screener will notify the plan sponsor or plan sponsor’s representative by letter and request the missing information.

  2. When the information is received and the VCP submission is complete, the screener will forward the VCP submission to the Group Manager for assignment.

7.2.2.4.3  (03-01-2002)
Assigning/Reviewing VCP Submissions

  1. The Group Manager will assign the VCP submission to a specialist who will:

    1. Notify the plan sponsor or the plan sponsor’s representative within two weeks of assignment, that he/she has been assigned to the case.

    2. Review the submission and related documents to determine that there are no significant problems not identified in the submission. If the submission should include a determination letter application and the plan sponsor refuses to submit a determination application (with appropriate user fee), no compliance statement will be issued with respect to the plan and examination of the plan will be considered.

    3. Review the failure(s) and correction method(s) set forth in the submission.

    4. Review the determination letter application, if applicable.

    5. Contact the plan sponsor or plan sponsor’s representative to discuss the proposed correction and the plan’s administrative procedures.

    6. Discuss all Anonymous Submissions and any other VCP submission that involves novel issues, facts or proposed correction methods with the Reviewer/Coordinator before completing negotiations with the plan sponsor or plan sponsor’s representative. Where appropriate, at the discretion of the Reviewer/Coordinator, the issue will be raised to the Group Manager.

    7. Recommend to the Reviewer/Coordinator that the correction is acceptable and, if applicable, the compliance fee amounts.

    8. Prepare the compliance statement (general or streamlined) (and the determination letter, if applicable) if agreement is reached. See Exhibits 7.2.2-1 through 7.2.2-3.

    9. Submit the compliance statement (and determination letter, if applicable) for review to Reviewer/Coordinator.

    10. Submit the compliance statement (and determination letter, if applicable) to the Group Manager for review following review by the Reviewer/Coordinator.

    11. Send two copies of the approved unsigned compliance statement to the plan sponsor for signature and request, if applicable, the plan sponsor to remit the total amount due to the U.S. Treasury by certified check(s) or cashier’s check(s). See Exhibit 7.2.2-5, Cover Letter to Plan Sponsor.

    12. Send the signed compliance statements, when returned by the plan sponsor, to the Group Manager for signature.

    13. Prepare case for closing when the Group Manager returns the signed compliance statements.

  2. If the submission contains an application for a determination letter, the specialist will follow the processing procedures for determination letters in IRM 7.2.2.5.

7.2.2.4.4  (03-01-2002)
Closing VCP Submissions

  1. When the VCP compliance statement has been signed by the Group Manager (and the determination letter approved, if applicable) and returned to the specialist, the case will be closed by the specialist who will do the following:

    1. Make copies of the signed compliance statement, and the determination letter, if applicable.

    2. Transmit the compliance fee check, if any, in accordance with the procedures in IRM 7.2.2.6.8.

    3. Send an original signed compliance statement (and determination letter, if applicable) to the plan sponsor (or plan sponsor’s representative if indicated on Form 2848). See Exhibit 7.2.2-6.

    4. Send a copy of the signed compliance statement (and determination letter, if applicable) to the plan sponsor’s representative (or plan sponsor if the representative received the originals). See Exhibit 7.2.2-7.

    5. Ensure that EDS is updated, if the submission included a determination application to reflect that the case is closed.

    6. Send the closed determination letter file to the Cincinnati Record Center at:

    7. Charge time spent on the determination application to Activity Code 301, Project Code 946 and time spent on the compliance statement to the applicable VCP Code.

    IRS
    Attention: Records Department
    RS 550, 9th Street
    4th Floor, Room 4511
    Cincinnati, Ohio 45201

7.2.2.4.5  (03-01-2002)
Compliance Statement

  1. The compliance statement issued for a VCP submission addresses the failures identified, the terms of correction, including any revision of administrative procedures, and the time period within which the proposed corrections must be implemented (including any changes in administrative procedures). The compliance statement also provides that the Service will not treat the plan as failing to satisfy the applicable requirements of the Code on account of the failures described in the compliance statement if the conditions of the compliance statement are satisfied.

  2. The compliance statement may be a general compliance statement or a streamlined compliance statement.

    1. A general compliance statement describes the failure(s), correction method(s) and revised administrative procedures in detail. See Exhibit 7.2.2-1.

    2. A streamlined compliance statement may be used for submissions that are simple, straightforward, and contain sufficient information to issue a compliance statement without further review. The fact that additional documentation (such as relevant plan provisions, Form 5500, etc.) must be obtained before the file is considered complete should not preclude a submission from being eligible for a streamlined compliance statement. The streamlined compliance statement incorporates the VCP submission by reference. See Exhibits 7.2.2-2 and 7.2.2-3.

  3. The compliance statement is conditioned on:

    1. There being no misstatement or omission of material facts in connection with the submission.

    2. The implementation of the specific corrections within the time specified in the compliance statement.

    3. The implementation of stated administrative procedures in the compliance statement in cases where the current procedures are inadequate for operating the plan in conformance with the applicable Code requirements.

    4. The satisfaction of any other conditions in the compliance statement.

7.2.2.4.6  (03-01-2002)
Failures Discovered After Initial Submission

  1. If the specialist discovers an unrelated failure while the request is pending, the failure generally will be added to the failures under consideration. However, if the additional failure is determined to be significant, all aspects of the plan may be examined and the rules pertaining to Audit CAP will apply. See sections 13 and 14 of Rev. Proc. 2001-17.

  2. If a plan sponsor discovers additional, unrelated failures after the initial submission, the plan sponsor may request that such failures be added to the submission. The specialist generally should add the unrelated failures to the submission unless the failures are not eligible for EPCRS or adding the unrelated failure is otherwise inappropriate for resolution, e.g., where the plan sponsor makes the request when processing the submission is substantially complete.

7.2.2.4.7  (03-01-2002)
Conference Right

  1. If it is determined that a compliance statement cannot be issued because the Service and plan sponsor cannot agree upon correction or a change in administrative procedures, the specialist should contact the plan sponsor, or the plan sponsor’s representative and offer a conference with the Service. The conference may be held either in person or by telephone, and must be held within 21 calendar days of the date of contact. The plan sponsor will have 21 calendar days after the date of the conference to submit additional information in support of the submission. Any request for an extension of the 21-day time period must be made in writing within the 21-day time period and must be approved by the group manager. Additional conferences may be held at the discretion of the group manager.

  2. If an agreement cannot be reached with respect to the submission, all aspects of the plan may be examined. The entire file should be transferred to the Area office with examination jurisdiction.

7.2.2.5  (03-01-2002)
Submission of a Determination Letter Application

    1. In any case in which a correction of a qualified plan failure includes correction of a Plan Document Failure or correction of an Operational Failure by plan amendment, other than adoption of a model amendment or a standardized prototype plan, the plan sponsor will be required to submit a copy of the amendment, the appropriate application form (i.e., Form 5300 series http://publish.no.irs.gov/FORMS/PUBLIC/PDF/11740G98.PDF or Form 6406 http://publish.no.irs.gov/FORMS/PUBLIC/PDF/24500G98.PDF) and the appropriate user fee with the initial submission.

    2. If an application is secured, a copy of the first page of the application form, a copy of Form 2848 http://publish.no.irs.gov/FORMS/PUBLIC/PDF/11980L97.PDF (if applicable), the original Form 8717 http://publish.no.irs.gov/FORMS/PUBLIC/PDF/64727B00.PDF and the user fee should be immediately forwarded to EP Determinations.

    3. Attach Form 3198 to provide instructions to EP Determinations personnel to establish the case using the appropriate Area office code and update the case to status 52 with the specialist’s employee number (which must be provided on the Form 3198).

      Note:

      Form 3198 is not available electronically. See IRS Forms web site for contacts.

    4. Send the Forms listed in b and c above to:

    IRS
    EP Processing Branch
    550 Main St. PO Box 2508
    Attention: Paulette Smith, User Fee Adjustment Clerk, Room 4024
    Cincinnati, OH 45201

7.2.2.5.1  (03-01-2002)
Qualification Failure Discovered During Determination Letter Process

  1. If a Qualification Failure for which no VCP submission was received is discovered by the specialist during the determination letter process, the plan will be resolved using the Audit CAP guidelines. See Rev. Proc. 2001-17, sections 13 and 14.

  2. If the Qualification Failure does not warrant an examination, the specialist, working with the Audit CAP Coordinator (or, for specialists based in Cincinnati, the EP Determinations Closing Agreement Coordinator), will:

    1. Resolve the failure.

    2. Prepare the closing agreement. See Exhibit 7.2.2-4.

    3. Apply the sanction structure of Audit CAP as provided in section 14 of Rev. Proc. 2001-17.

    4. Impose a sanction, if the failure is minor, no higher than the presumptive amount that would apply if the VCP correction fees in section 12 of Rev Proc. 2001-17 were applied.

    5. Charge time spent on the determination application to the appropriate 301 Activity Code and time spent on the closing agreement to Activity Code 316, whether it is by the specialist or coordinator.

    6. Issue the determination letter after the Service has signed the closing agreement.

  3. If the Qualification Failure warrants an examination, after the determination case has been developed to the extent possible and all deficiencies documented, the specialist should transfer the entire file to the Area office with examination jurisdiction. The specialist’s Group Manager should contact EP Classification to coordinate the assignment of the determination case and the selection of an open return for examination by the appropriate Area office. The examining agent should:

    1. Issue the determination letter and closing agreement only upon favorable resolution of all issues raised during examination.

    2. Charge time spent doing the examination and the resulting closing agreement to Special Project Code 800 (determination letter conversion).

    3. Charge time spent on the determination letter application to the appropriate 301 Activity Code.

  4. If a Qualification Failure for which no VCP submission was received is voluntarily raised by the plan sponsor during the determination letter process, the specialist should:

    1. Give the plan sponsor the opportunity to perfect a VCP submission.

    2. Send a copy of the first two pages of Form 5500 to the VCP Coordinator for the Area in which the specialist is located for purposes of controlling the VCP submission.

    3. Follow the VCP procedures set forth in IRM 7.2.2.4.1 and IRM 7.2.2.4.3 through 7.2.2.4.6.

    4. Issue the determination letter and the closing agreement to the plan sponsor.

    5. Charge time spent on the VCP submission to the applicable VCP Code.

    6. Resolve the failure under the Audit CAP guidelines if the plan sponsor fails to perfect a VCP submission.

7.2.2.6  (03-01-2002)
Correction on Audit—Audit CAP; Audit CAP for 403(b) Plans and SEPs

  1. Audit CAP is a program established in the Area offices that is available with respect to a plan that is under examination. See section 5 of Rev. Proc. 2001-17 for the definition of "under examination" . Under Audit CAP, the plan sponsor pays a monetary sanction that is a negotiated percentage of the maximum payment amount. The maximum payment amount approximates the amount of tax the IRS could collect as a result of the disqualification of the plan.

    Note:

    Unless otherwise provided, the references in this IRM 7.2.2.6 to Audit CAP apply equally to Audit CAP for 403(b) plans and SEPs.

  2. In addition to the procedures set forth below, the specialist should refer to:

    1. Rev. Proc. 2001-17, sections 13 and 14, regarding the description of and sanctions applicable to Audit CAP;

    2. IRM Part VIII, Closing Agreement Handbook, (Appeals) for general guidance on the forms to be used, the format to be followed, the content and instructions for the preparation of closing agreements (see, also, Rev. Proc. 68-16, 1968-1 C.B. 770); and

    3. The corresponding portion of IRM Part VII of the Law Enforcement Manual (LEM).

7.2.2.6.1  (03-01-2002)
Entering into Closing Agreement

  1. Audit CAP is not a settlement program, as the term is used by the Office of Appeals, since no additional tax results when a plan is not disqualified. (Settlements under the jurisdiction of the Chief, Office of Appeals, deal with disputed tax liability.)

  2. Specialists must consult with the Group Manager prior to advising the taxpayer that disqualification of the plan is being proposed. The taxpayer can then be offered the opportunity to enter into negotiations for a closing agreement under Audit CAP. If the taxpayer refuses, the plan involved will be disqualified, and all the sanctions and procedures resulting from disqualification (such as issuance of a 30-day letter) will apply.

  3. The specialist should discuss any case where the specialist is considering entering into a closing agreement with the Audit CAP Coordinator before completing negotiations with the taxpayer. The Central Coordination Committee is available as a resource for the Audit CAP Coordinator.

  4. In cases involving 500 or more participants, or involving a potential maximum payment figure of $1,000,000 or more, the Audit CAP Coordinator should consult with the Manager, Voluntary Compliance, T:EP:RA:VC, located in Washington D.C., before finalizing the closing agreement. The Manager, Voluntary Compliance may also be consulted during the negotiation phase of a closing agreement in other cases.

  5. Provisions on the prohibition of requests to taxpayers to waive rights to bring civil actions, added by the IRS Restructuring and Reform Act of 1998 (RRA) section 3468 affect the closing agreement procedures. These RRA provisions are applicable to all closing agreements entered into by TE/GE personnel.

    1. The closing agreement should not contain any release by the taxpayer of any right of action against the Service or its employees for civil violations or any other action taken in connection with the federal internal revenue laws that may be available to the taxpayer.

    2. If the taxpayer does not have counsel, the specialist should rarely ask the taxpayer to waive his/her right to bring a civil or other non-tax action against the government. In the case of a taxpayer with a power of attorney (POA) on file, special consideration should be given to sending a written request to the person listed on the POA. In either event, the file should include signed and dated documentation from the taxpayer or the taxpayer’s representative, and complete notes on the Form 5464, Case Chronology Record, evidencing the process used to obtain any waiver subject to this provision.

7.2.2.6.2  (03-01-2002)
Case Development

  1. During the development phase of a case, the:

    1. Facts of the case should be fully developed.

    2. Legal aspects of the case assessed.

    3. Statute of limitations should be determined and protection considered on the returns of all affected parties, subject to managerial concurrence and approval.

    4. Taxability of the various parties determined. See IRM 4.72.12, Revocations, for information on taxability.

  2. In the course of an examination (of cases with issue(s) covered by the program), workpapers must include a statement that:

    1. Consideration was given as to whether the case under examination is eligible for a closing agreement; and

    2. The Group Manager or Audit CAP Coordinator was consulted.

  3. If it is determined that a case is ineligible for the program, the workpapers must specify the basis for the ineligibility.

7.2.2.6.3  (03-01-2002)
Negotiations

  1. The terms of the closing agreement can be negotiated with the taxpayer (or authorized representative). The workpapers must specify:

    1. Negotiations with the taxpayer (whether or not the case results in a closing agreement), and

    2. The terms offered to the taxpayer if the negotiations are not successful.

  2. If the specialist is unable to reach an understanding on the terms of a closing agreement, and there is no signed closing agreement, the plan involved will be disqualified, and all the sanctions and procedures resulting from disqualification (such as issuance of a 30-day letter) will apply.

  3. The Authorization and Declaration of Representative, Form 2848, (POA), if applicable, must specify that the taxpayer’s representative is authorized to:

    1. Enter into negotiations.

    2. Execute a closing agreement on the taxpayer’s behalf.

  4. During the course of negotiations, the taxpayer should be informed that sanction payments under Audit CAP are not deductible for federal income tax purposes. The closing agreement must include language to this effect.

7.2.2.6.4  (03-01-2002)
Sanctions

  1. If a failure is corrected under Audit CAP, the sanction imposed on the plan sponsor will not be excessive, and will bear a reasonable relationship to the nature, extent, and severity of the failure, taking into account the extent to which correction occurred before audit. See Rev. Proc. 2001-17, section 14.

7.2.2.6.5  (03-01-2002)
Format

  1. The following elements must be included in any closing agreement. See Exhibit 7.2.2-4.

    1. Identify all persons/entities by name, address and EIN who will be parties to the closing agreement, listing the plan sponsor first.

      Note:

      The plan sponsor must be so listed for purposes of records control, whether or not the sponsor is required to make payment under the agreement.

    2. Complete, but brief recitation of the facts, and any corrective action being taken regarding the plan.

    3. Statement as to the payment amount made to the U.S. Treasury.

    4. Statement as to the payment amount, if any, being made to the plan.

    5. Statement that the payment to the government is not deductible, etc., for Federal tax purposes.

    6. Statement of the tax treatment that the IRS will accord the plan involved (i.e., if plan is qualified, trust is exempt, etc.).

    7. Statement that the agreement is limited to Internal Revenue Code matters and does not extend to other Federal law, including Title 1 of ERISA.

    8. Statement at the end of the closing agreement as to its finality.

7.2.2.6.6  (03-01-2002)
Audit CAP Coordinator

  1. The Audit CAP Coordinator is responsible for:

    1. Maintaining consistency in Audit CAP closing agreement cases.

    2. Providing correction guidance to specialists.

    3. Ensuring simultaneous processing of the closing agreement package and the remittance(s) to the Collection Remittance Processing function.

7.2.2.6.7  (03-01-2002)
Closing Procedures

  1. The case will be processed by the specialist as follows:

    1. Draft closing agreement after negotiations for the specific terms of the closing agreement are completed for review by all parties.

    2. Finalize the closing agreement with the applicable taxpayer(s) and secure the total amount due to the U.S. Treasury. All remittances must be made by certified check(s) or cashier’s check(s) made payable to the U.S. Treasury.

    3. Transmit the closing agreement executed by the taxpayer(s) and the remittance(s) to the Audit CAP Coordinator by express mail or hand-carry the package.

  2. The Audit CAP Coordinator will coordinate the IRS execution of the closing agreement with the designated signature authority. After all parties have executed the agreement, the agent will prepare a closing agreement package. The package will include:

    1. Document Transmittal (Form 3210)

    2. Cover memorandum

    3. Closing agreement.

  3. The closing agreement is used as the basis for the assessment and as a substitute return.

  4. Assessment will be made as a Non Master File (NMF) excise tax account under the plan sponsor’s name and EIN, (the control name/EIN for the closing agreement (whether or not the sponsor is required to make payment under the agreement)). See IRM Part III (IRM 3.17).

  5. The Audit CAP Coordinator will forward the closing agreement package and the remittance(s) in accordance with IRM 7.2.2.6.8, Remittance Procedures.

  6. When preparing the examination for closing, the specialist will include the following entries on the Form 5650, EP Examined Closing Record
    http://publish.no.irs.gov/FORMS/INTERNAL/PDF/42724A01.PDF:

    1. Item 13, Disposal Code—Enter "15" .

    2. Item 602, Tax—Enter the amount agreed to in the closing agreement.

    3. Item 40, Special Project Code—Enter the appropriate special project code.

    4. In the "Remarks" Section—Enter the words "DO NOT ASSESS" .

  7. A copy of the final closing agreement or compliance statement without attachments and the Form 3210 used to transmit the remittance are placed in the case file prior to closure from the examiners group.

7.2.2.6.8  (03-01-2002)
Remittance Procedures

  1. Prepare Form 3210, Document Transmittal, listing the plan sponsor’s name, plan sponsor’s EIN, the amount of the check, and the eight digit Agency Location Code (ALC) number of the Ogden Submission Processing Center (OSPC). The OSPC ALC is Ogden, UT 20-09-2900.

  2. Prepare Form 3244 Payment Posting Voucher and Form 5734 Non-Master File Assessment Voucher. Include the plan number and the tax period on both forms. If a payment needs to be applied to more than one account, separate Forms 3244 and 5734 need to be sent for each action.

  3. Prepare a cover memorandum to the OSPC Receipt and Control Branch and attach to the front of the closing agreement or the compliance statement (without attachments, if any).

  4. Identify the payor’s name and EIN in the cover memorandum as the control name for the closing agreement or compliance statement for the OSPC’s Receipt and Control Branch.

  5. If several checks are submitted as part of the closing agreement or compliance statement, then the payors’ names and EINs should be listed in the Form 3210 and totaled. The total on the form must agree with the total amount stated in the closing agreement or compliance statement.

  6. Forward the appropriate documents to the OSPC.

  7. Use Form 3210 to transmit all closing agreements or compliance statement cover pages with remittances. The remittances will be processed as a manual deposit as described in IRM Part V. The closing agreements or compliance statements will be coded for the remittance amounts received and forwarded, together with appropriate accounting documents and the cover memorandum, to the OSPC. The accounting documents must contain the ALC, as indicated on the transmitting Form 3210, for the OSPC.

  8. The transmittal package accompanied by a memo is sent by overnight mail using Form 9814 to:

    IRS
    Attention: Kyle Boster
    Mail Stop 6059
    SP:P:RC:P:D30
    1160 W 1200 S
    Ogden, Utah 84201

7.2.2.6.9  (03-01-2002)
Monitoring Reports

  1. A monitoring report must be submitted quarterly to Manager Voluntary Compliance Washington D.C. T:EP:RA:VC. This report must be submitted whether or not any closing agreements or compliance statements were entered into during that quarter. See IRM 7.10.1.

  2. The monitoring report should include the following information broken down according to program or procedure (e.g., VCP general procedure, VCT, and Audit CAP):

    1. Number of submissions received, closing agreements and compliance statements in-process, closed that quarter, and closed year-to-date

    2. Breakdown of cases closed by type of issue, including non-amenders, improper integration, partial termination, operational top heavy failures, and, other issues (include a comment describing the other issues)

    3. Number of participants protected in that quarter

    4. Total maximum payment amounts (100%) for all agreements in that quarter, Audit CAP only.

    5. Total payment amounts finalized for all agreements in that quarter.

  3. Monitoring reports are due to by the 15th day of the month following the period (quarter) covered by the report.

7.2.2.7  (03-01-2002)
Operational Failures Under SCP

  1. Reserved

7.2.2.8  (03-01-2002)
Excise Tax Procedures for VCP and Audit CAP

  1. Special rules apply for cases involving excise taxes, as follows:

    1. The procedures under paragraph (2) apply to VCP and Audit CAP with respect to excise taxes required to be reported on Form 5330 http://publish.no.irs.gov/FORMS/PUBLIC/PDF/11870H98.PDF.

    2. Special procedures in paragraph (3) apply with respect to excise taxes arising under IRC section 4974 (the excise tax for failure to satisfy the minimum distribution requirements of IRC section 401(a)(9)).

  2. In general, excise taxes should be resolved by securing a Form 5330 providing for 100% of the tax and interest outstanding (recommendation to the service center to waive failure to file and/or failure to pay penalty, under IRC section 6651, is at the discretion of the specialist). The excise tax should not be resolved as part of the compliance statement or closing agreement document. After inspecting the Form 5330 for accuracy, the specialist will forward the completed Form 5330, with or without the excise tax payment, to the appropriate service center with recommendation on any waiver of applicable penalties. See IRM 4.70, for procedures on processing Form 5330.

  3. IRC section 4974(d) provides for waiver of the minimum distribution excise tax under certain circumstances.

    1. Where a plan sponsor under VCP requests a waiver of IRC section 4974 as part of the correction to correct a failure of the minimum distribution requirements under IRC section 401(a)(9), the specialist should include the waiver in the compliance statement. If the participant subject to the excise tax is an owner-employee or a 10 percent owner of a corporation, the plan sponsor must provide an explanation supporting the waiver request. See Rev. Proc. 2001-17, section 6.07.

7.2.2.9  (03-01-2002)
Special Procedures

  1. In order to encourage voluntary and timely correction of failures of the qualification requirements, specialists should not request copies of a plan sponsor’s compliance audit report. This applies under VCP as well as under Audit CAP. Of course, a taxpayer may always offer to share with a specialist part or all of a compliance audit report in defense of a position or to demonstrate compliance under SCP.

7.2.2.10  (03-01-2002)
Closing Agreements Outside the Scope of EPCRS

  1. Under certain circumstances, EP will enter into a closing agreement with respect to failures that fall outside the scope of EPCRS.

  2. In such cases, for a voluntary submission follow the procedures for VCP in IRM 7.2.2.4. If the case is not a voluntary submission, follow the procedures for Audit CAP in IRM 7.2.2.6.

  3. Closing agreements outside the scope of EPCRS should be submitted to the Washington D.C. office for final review and signature.

Exhibit 7.2.2-1  (03-01-2002)
Sample Compliance Statement for Qualified Plans

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Exhibit 7.2.2-2  (03-01-2002)
Sample Streamlined Compliance Statement for Qualified Plans

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Exhibit 7.2.2-3  (03-01-2002)
Sample Streamlined Compliance Statement for 403(b) and SEP Plans

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Exhibit 7.2.2-4  (03-01-2002)
Sample Closing Agreement

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Exhibit 7.2.2-5  (03-01-2002)
Cover Letter to Plan Sponsor Requesting Execution of Compliance Statement

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Exhibit 7.2.2-6  (03-01-2002)
Final Cover Letter to Plan Sponsor

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Exhibit 7.2.2-7  (03-01-2002)
POA Letter

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