Realized earnings in the trust are taxable each year the plan is not qualified (and the assessment of tax is not barred by statute). Trust earnings must be reported on Form 1041, which must be filed annually by the trustee.

Per IRC 402(b)(4), if the plan is disqualified for failure to meet IRC 401(a)(26) or IRC 410(b), each HCE must include in income an amount equal to the employees’ entire vested accrued benefit not yet included in income. If the plan is disqualified for any other reason, plan contributions allocated to participant accounts for that year are taxable on the plan participant’s Form 1040 to the extent nonforfeitable.

Plan contributions allocated to participant accounts are not deductible on the plan sponsor’s Form 1120 to the extent they are forfeitable.

Distributions made from the plan are not eligible for rollover to another qualified plan or to an IRA, and therefore are taxable to the individual on their Form 1040 in the year of the distribution.

Any funds received from an ineligible rollover distribution, which are retained in an IRA, maybe subject to excise tax on excess contributions under IRC 4973.

Enter on the top margin in bold face print "FORM 5500 CONVERTED TO FORM 1041 BY TEGE:EP" .

Date stamp Form 1041 to establish the date actually filed.

Attach Form 3198, Special Handling Notice, with the following completed:
• Name: List the name of the trust;
• Year: List the year of the attached Form 1041;
• Special Instructions: Recommend the assessment or non-assessment of failure to pay and failure to file penalties. 1. 2. 3.

Attach Form 13133, Expedite Processing Cycle, with the following completed:
• List your name, phone number and mail code;
• Select " Delinquent Return" ;
• Select "See Form" 3198…1. 2. 3.

If payment is received, prepare Form 3244-A, Payment Posting Voucher, for each Form 1041 received. Complete these items with comments as noted:
• EIN;
• Form number/MFT: Enter 1041/05;
• Tax period;
• Transaction date: Enter the date the payment was received;
• Taxpayer name, date, address and zip code;
• Transaction Data: List the entire amount received for the year under transaction code 610 (Remittance With Return) and the same amount under "Total payment" ;
Remarks: List the check number and the amount of the check. If the payment is to be broken out over more than one year, list each year and the amount applied to each year. List the plan number .
Prepared by: Enter the examiner’s name, group number and phone number.

Make a copy of the Form 1041, Form 3198, Form 13133 and Form 3244-A (if applicable) for the case file.

Prepare Form 3210, Document Transmittal:
• List all Forms 1041 being forwarded;
• If payment was received, list all check numbers and the amounts.

Forward Forms 1041 by overnight mail to the Service Center for processing as follows:

The referral should be sent to EP Classification; however if SB/SE or LMSB is directly involved in the case, the referral should be made directly to SB/SE (or LMSB). If the referral is made direct to SB/SE (or LMSB) a copy of the referral should be sent to EP Classification. Effective March 31, 2003, the address for EP Classification is:

A copy of the RAR should be attached to the referral (Form 5666) along with a rough calculation of Form 1041 tax due.

Copies of all referral packages (Form 5666, the RAR and tax calculations) should be made for the case file and included as part of the workpapers.

Letter 1756 (for proposed revocation) or 1758 (for proposed non-qualification) ;

Publication 1;

Publication 594;

Publication 1020;

Notice 1214, and;

Revenue Agent Report

Issues– Each separate issue will be clearly stated and numbered. For example, assume that during an examination it was determined that a plan did not comply with the top-heavy minimum contributions requirements, and did not make distributions to participants who separated from service in conformity with the top-heavy vesting schedule. Issue One would be "Whether minimum contributions per IRC 416(c)(2)(A) were made for a top-heavy plan for the plan year ending 12/31/2001." Issue Two would be "Whether the accelerated vesting provisions under IRC 416(b) were applied to all plan participants or former participants who received distributions during the plan year ending 12/31/2001."

Facts– The facts section of the RAR will include a brief history of the plan and provide pertinent details surrounding the qualification issue(s). This section should also cite any plan provisions relevant to the issues raised. For the top-heavy issues stated above, the plan sections dealing with top-heavy contributions and accelerated vesting should be described. Examples of information that would be included (as applicable to the issues) are:
• The plan years under examination
• Type of business of the plan sponsor
• Date business started/incorporated
• Ownership of business sponsoring the plan
• Type of tax return filed by the plan sponsor and the tax year end
• Effective date of plan
• Type of plan
• Latest determination letter
• Number of plan participants
• Plan participants effected
• Contributions made to the plan for the years under examination
• Specific applicable plan sections, and
• Other relevant case specific details.

Law– The law section should contain a summary of Code sections, Revenue Rulings, court cases, etc., that relate to the issue(s) raised. Do not cite General Counsel Memos (GCM) or Private Letter Rulings (PLR) as sources of authority in the RAR.

Analysis/Government's Position– The analysis section should discuss each issue separately and apply the law and the facts relevant to each specific issue. This section should also indicate the date on which the plan failed to qualify. An explanation of why EPCRS was not used must be provided. This section should be concluded by clearly stating the government’s position.

Taxpayer's Position– This section should reflect the Taxpayer's position including any rebuttals the taxpayer has made regarding the Government's position. If the taxpayer has not provided a position on the issue(s) a simple statement to the effect that the taxpayer has not provided a response, is sufficient.

Rebuttal/Conclusion– If the taxpayer provides a position on the issue(s), the RAR should contain a rebuttal to the taxpayer’s position. The Government’s position should be restated as a conclusion in all cases.

The EP Administrative Record Index will be the first page. See Exhibit 4.71.3-5 for the proper format. The "Description of Document " portion of the index should contain a full description of the document, not just a form number or letter number. Agents will ensure that all protest and final adverse cases have an administrative record prepared and properly indexed.

The index will be prepared in a manner such that the subsequent reviewer may readily find any document, workpaper, or correspondence contained in the file.

All items that comprise the administrative record will be assembled in chronological order with the most recent one on top. Tabs in the administrative record should be affixed to the cover sheet corresponding to the items in the administrative record. The tabs should not be permanently affixed to the original documents.

A separate hard copy administrative file case folder will be included with the examination case file for all "unagreed" and "agreed" revocations/non-qualification cases.

The agent will reconstruct the administrative record to the extent possible from the taxpayer's records. The file will contain a copy of the plan and trust agreement for the period under examination and copies of all prior determination letters. The file will also contain any plan amendments made, subsequent to the period under examination. Additionally, any written correspondence (with attached documents) between the agent and the taxpayer/POA must also be included.

In general, the administrative record does not include internal documents, such as interoffice memorandums, reviewer's memorandums, the agent's workpapers, the Case Chronology Record, or summaries of telephone conferences. Such internal documents should only be incorporated into the administrative record where the content/issue is specifically pertinent and has been shared in writing between the Service and the taxpayer.

A Form 1041 is secured and the case is timely forwarded for closure within TE/GE, or

The Form 1041 is timely referred to the appropriate Exam Functional Unit (SB/SE or LMSB) by the use of Form 5666, EP/EO Referral Information Report.

The trustee has signed the Schedule P, and

The Schedule P has been filed with the Form 5500 series return.

A trustee signed a filed Form 5500 series return and is identified as such on the return, and

There is sufficient data on the return to calculate the tax liability of the trust. See Martin Fireproofing Profit Sharing Plan & Trust v. Commissioner, 92 T.C. No. 77 (1989).

A Service Center or Collection function has determined reasonable cause for a delay in filing or has asserted a delinquency penalty, or;

A delinquent return that shows no tax liability requires a change in tax liability after examination.

Describe the circumstances of the delinquent filing in the examination report and workpapers, and;

Specify whether there was a reasonable cause for the delay in filing. If reasonable cause for delay in filing is not established, the delinquency penalty will be asserted.

The taxable periods for which the entity was required to file returns;

The reasons why the entity failed to file the required returns;

Whether any indications of fraud exist, and;

Applicable penalties.

Advise the entity of the requirement of their responsibility to file all delinquent returns and statements, without regard to the number of years or taxable periods involved.

Solicit the returns, including any tax liability, together with a written statement from the Trustee, signed under penalty of perjury, giving all the facts and circumstances that caused the delay. The statement should include any reasons that the entity believes would establish reasonable cause for failure to file. Form 4571, Explanation for Filing Return or Paying Tax Late can be used for this purpose.

Return was mailed in time. A return is considered mailed in time if the date of the postmark stamped on the envelope falls on or before the due date. If the due date falls on Sunday or a legal holiday, the following business day is within the legal period.

Delay or failure to file was due to erroneous information given the taxpayer by an Internal Revenue officer or employee. See IRM 20.1.1.3.2.4.1 and 20.1.1.3.2.4.2.

Delay was caused by death or serious illness of the taxpayer or a death or serious illness in his/her immediate family. In the case of a corporation, estate, trust, etc., the death or serious illness must have been of an individual having sole authority to execute the return, or of a member of such individual’s immediate family. See IRM 20.1.1.3.1.2.4.

Delay was caused by unavoidable absence of the taxpayer. In the case of a corporation, estate, trust, etc., the absence must have been of an individual having sole authority to execute the return. See IRM 20.1.1.3.1.2.4.

Delinquency was caused by the destruction by fire or other casualty of the taxpayer’s place of business or business records. See IRM 20.1.1.3.2.5.

Taxpayer, prior to the time for filing the return, applied to the Area Director's office for proper blank forms and these were not furnished to him/her in sufficient time to permit the executed return to be filed on or before its due date.

Taxpayer proves that he/she personally visited the office of the Area Director or subordinate office before the expiration of the time within which to file the return for the purpose of securing information or aid to properly make his/her return, and through no fault of his/her own was unable to see the representative of the Service.

A cause for delinquency which appears to a person of ordinary prudence and intelligence as a reasonable cause for delay in filing a return and which clearly indicates no willful intent to disobey the taxing statutes, may be accepted as reasonable. See IRM 20.1.1.3.1.2.

In cases where ignorance of the law is claimed, reasonable cause should not be presumed. Each case must be determined on its own merit. Ignorance of the law can be considered for reasonable cause only if other facts support this contention, such as first-time filers, sudden first-time FTD depositary requirements, etc. The taxpayer should evidence ordinary business care and prudence and the case should be judged on its own merits. See IRM 20.1.1.3.1.2.1. The Supreme Court has held that generally a taxpayer’s reliance on a professional agent, such as an attorney or accountant, to file a timely tax return does not constitute reasonable cause for purposes of IRC 6651(a). See U.S. v. Boyle, 85–1 USTC paragraph 13,602.