SunGard Relius

We are all familiar with the structure of a bad horror film. Just when you think the villain has perished, the main character will survive and the film will end, the villain reappears only to wreak further havoc. The IRS’s management of the Form 5558 extension requests reminds us of one of these bad horror films. We thought sharing this third party administrator’s (TPA) experience with you will assist you in the event you have similar problems.

One of the more dreaded phone calls an administrator can receive is that from a client informing the administrator that the client has received a letter from the IRS or from the DOL. Recently, we have received several calls from clients informing us that some of their Form 5500 extension requests (Form 5558) were rejected because the forms were unsigned. Of course, the IRS letters were sent improperly. The IRS modified the Form 5558 instructions a few years ago to eliminate the requirement that the form be signed when a plan sponsor is requesting an extension for a Form 5500 (a plan sponsor, however, must sign the form when requesting an extension for filing a Form 5330). Specifically, the Form 5558 instructions state that “When using Form 5558 to request an extension of time to file Form 5500 or Form 5500-EZ plan sponsors or plan administrators are not required to sign the form.”

Recently, we received a call from a frustrated TPA who indicated the IRS continues to struggle with this issue. At the beginning of 2008, this TPA’s firm completed Forms 5558 for many of their clients. Following the instructions, they sent the forms to the IRS unsigned. The firm took advantage of the extension request and filed many of their Forms 5500 within the 2½ month extension period. Following the filing of the Forms 5500, many of their clients began receiving letters from the IRS informing them that their extension request was denied because it was unsigned. In subsequent weeks, approximately half of the TPA’s clients received IRS rejection letters. In fact, more of their clients received rejection letters last week. Some clients also received letters from the DOL indicating that their Forms 5500 were filed late. As you can well imagine, the letters caused significant concern among the TPA’s clients and put the TPA in a bad light. The penalties for filing a late 5500 are significant: DOL penalties are $1,100/day with no maximum and the IRS penalties are $25/day with a maximum of $15,000. There are additional penalties for filing a late Schedule SB or MB and for a late Schedule SSA.

The TPA immediately contacted the IRS about the problem. The IRS agent agreed that the letters were sent in error and indicated that it was a training problem. However, instead of assuming responsibility for the error, the IRS agent curtly warned the TPA not to ignore the letters. The IRS agent went on to insist that they write individual letters for each client requesting a reconsideration of the rejection. The required letters, of course, resulted in additional costs for the TPA firm and its clients. The TPA dutifully prepared letters requesting a reconsideration of the rejection for each of their clients. The IRS sent back letters indicating that it had reconsidered and had approved the extension requests. The TPA assumed the IRS had resolved the problem. Apparently, the IRS department processing the Forms 5558 and the department assessing penalties for late Form 5500 filing do not communicate. The IRS has begun assessing penalties on late Form 5500 filings against plan sponsors who filed a Form 5500 with an unsigned Form 5558.

The TPA contacted us for assistance. We contacted the IRS National Office not only to resolve the current issues but also to resolve future penalty letters we expect the IRS to send to this TPA’s clients as well as other TPAs. The National Office has provided us with a contact at the IRS service center in Ogden, Utah. Today, we spoke with an IRS analyst from Ogden. She was very apologetic and assured us that the IRS would resolve the problems. She also indicated that the IRS may be able to provide some form of letter to the TPA firm indicating that the TPA firm was not at fault.

So, what should a practitioner do if presented with a similar situation? Do not ignore the rejection of your extension and assume the IRS will straighten out the mistake. You should immediately contact the IRS and inform them of their mistake. Insist that the IRS contact the department handling penalty letters for late Form 5500 filings and cancel any such letters that may be forthcoming. Although you may inform the IRS by phone of the mistake, you should follow up the call with a letter. When speaking with the IRS, write down the date of the conversation, the name of the IRS agent and his/her badge number. The information will be helpful if the IRS does not resolve the issue promptly. If your firm experiences a pattern of rejections, you should insist on speaking with a supervisor.

5500 Workshop/401(k) Workshop. In our upcoming 5500 workshop, not only will we address all of the important questions and issues in the 5500, 5500-EZ, and schedules, we also will explain how to use and prepare effectively for EFAST2. We also have scheduled our 401(k) Plan Workshop to follow the 5500 Workshop. The topics for the 401(k) Workshop include the Suspension of the Required Minimum Distribution;, PPA ’06 Technical Corrections; New Guidance of Permissive Disaggregation; Safe Harbor 401(k) Plan Design; Participants in Financial Difficulties: loan defaults, hardship distribution and QDROs; and Complex Testing of Ordinary Allocations; and Penalties and Additional Income Taxes. For more information on the seminars, click here.

The 5500 Filing Guide is a comprehensive guide to completing the 5500 (and schedules) effectively and efficiently. The recently updated book not only includes practical explanations of each line on all the forms and schedules, but it also provides hundreds of examples and FAQs. For information on how to order the book, click here.

Relius Government Forms. SunGard’s Relius Government Forms 5500 Web Client is a secure, interactive, online solution that can help you and your clients meet the challenges posed by EFAST2. For more information, see our Web site.

Question and Answer Pamphlet on EFAST2. To help 5500 preparers explain the changes made by EFAST2, SunGard has prepared a Q&A pamphlet to answer the employers’ questions. Find out more here.