Voluntary Compliance Resolution Program (Rev. Proc. 92-89).

On February 23, 1993, Tax Executives Institute filed the following comments with the Internal Revenue Service on Revenue Procedure 92-89, relating to the IRS's Voluntary Compliance Resolution (VCR) Program for employee benefit plans. The comments were prepared under the aegis of the Employee Benefits Subcommittee of the Institute's Federal Tax Committee; the subcommittee's chair is David L. Klausman of Westinghouse Electric Corporation, and the committee's chair is David F. Nitschke of Amerada Hess Corporation. The submission took the form of a letter from TEI President Robert H. Perlman to acting Commissioner of Internal Revenue, Michael P. Dolan.

On October 28, 1992, the Internal Revenue Service released Rev. Proc. 92-89 (1992-46 I.R.B. 27) setting forth the Voluntary Compliance Resolution (VCR) program guidelines and procedures. VCR is a temporary, experimental program permitting employers that meet certain conditions to voluntarily correct operational defects in their qualified retirement plans and avoid the risk that the IRS may disqualify their plans. TEI believes that the VCR program generally reflects a thoughtful balance of the myriad tax and social policy goals inherent in the qualified retirement plan area. In the comments that follow, TEI addresses certain issues that it believes require clarification to ensure that the VCR program is accessible to all taxpayers, particularly Coordinated Examination Program (CEP) taxpayers.

Background

Tax Executives Institute is the principal association of business tax executives in North America. The Institute's approximately 4,700 members represent more than 2,400 of the largest companies in the United States and Canada. TEI is dedicated to the development and effective implementation of sound tax policy, to promoting the uniform and equitable enforcement of the tax laws, and to reducing the cost and burden of administration and compliance to the benefit of taxpayers and the government alike. We believe that the diversity and training of our members enable us to bring an important, balanced, and practical perspective to the issues raised by the Rev. Proc. 92-89 and the VCR program.

General Comments

The volume and pace of legislative and administrative changes affecting employer-sponsored retirement plans in the last decade have been enormous. Taxpayers have expended herculean efforts and vast resources to implement required plan amendments and monitor compliance with those changes. Despite a taxpayer's diligent efforts to comply with manifold, complex provisions, plans occasionally may fail one or another of the qualification requirements. Unfortunately, the only enforcement mechanism set forth in the Code is the disqualification of plans, the dire tax consequences of which are often far disproportionate to the violations that may have occurred. Furthermore, among the collateral tax effects of disqualification of a plan are adverse income tax effects to innocent participants. Thus, TEI commends the IRS for adopting administrative enforcement tools -- such as VCR and its precursors, the Closing Agreement Program (CAP)(1) and the Administrative Policy Regarding Sanctions -- to sanction technical violations that do not warrant disqualification.

Briefly described, the VCR program permits plan sponsors (including employers and trustees) to correct operational plan defects. Upon correction of the plan's defects and payment of a prescribed user fee, the IRS will issue a compliance statement acknowledging that acceptable corrections were made and agreeing that the plan will not be disqualified on account of the identified defects. The VCR program will be available until December 31, 1993.

The VCR program is a logical extension to the qualified plan area of the principles undergirding Compliance 2000, which TEI has supported from the outset. TEI firmly believes that the voluntary compliance system would be enhanced if the VCR program were made a permanent addition to the enforcement programs of the IRS. Thus, TEI recommends that the VCR program be extended indefinitely beyond the current expiration date of December 31, 1993.

In many respects, the VCR program is a clear and welcome improvement over the CAP program. The voluntary nature of the program and the imposition of relatively modest "user fees" to sanction plan violations encourage the prompt correction of violations. In contrast, under the CAP program, the plan sponsor is faced with a maximum payment up to the full amount of tax, penalties, and interest that could potentially be imposed upon disqualification of the plan. TEI believes the VCR program mitigates the "gotcha" situation that may arise in negotiating a settlement payment under the CAP program.

Nonetheless, TEI believes that the VCR program could be improved by adopting one of the key features of CAP -- namely, the ability to negotiate a settlement on an anonymous basis. Under CAP, taxpayer representatives have been permitted to describe the facts of the case and to negotiate the basis for settlement -- including both the "fee" and the necessary corrective steps to "perfect" the plan to maintain its qualified status -- without disclosing the identity of the applicant. Incorporating a similar provision that permits a plan sponsor to anonymously negotiate the plan correction would enhance the use of VCR, particularly where it is unclear what steps are necessary to correct the plan or where multiple options are available to cure the plan's defect. The ability to discuss complicated plan corrections with a government sounding board would truly enhance the usefulness of VCR.

Specific Comments

1. Section 3.03 - Qualification for VCR Program

a. Definition of "Under Examination." Section 3.03 of the procedure states that a plan under Employee Plans examination (i.e., an examination of a Form 5500 series return) is not eligible for the program. The section further provides: "This includes any plan for which the plan sponsor, or a representative, has received verbal or written notification from the EP/EO Division of an impending Employee Plans examination or of an impending referral for Employee Plans examination, and also includes any plan that has been under Employee Plans examination and is now in Appeals or in litigation for issues raised in the Employee Plans examination."

TEI is concerned that the definition of "under examination" in Rev. Proc. 92-89 may preclude the use of the VCR program for all taxpayers under continuous examination, particularly CEP taxpayers. At the outset of a CEP examination, the case manager and taxpayer will discuss many aspects of the audit plan, including whether an Employee Plan (EP) examination will be conducted. Furthermore, CEP examiners routinely request that a copy of all Form 5500s filed during the audit cycle be produced, regardless of whether the case will be referred to an EP/EO specialist for further examination. The literal language of section 3.03, together with standard CEP examination practices, may lead to the conclusion that the plan is under examination from the inception of the examination of the corporate income tax return and thereby preclude the use of the VCR program for all but the most recent employee plan year not under examination. TEI believes that the IRS should clarify section 3.03 to ensure that larger employers -- those possessing larger and more complex benefit structures and qualified plan arrangements and, thus, perhaps most in need of relief for unintentional, operational plan defects -- will not be deprived of the benefits of Rev. Proc 92-89. TEI recommends that a plan be considered "under examination" from the earlier of the date of a written notice to a taxpayer that either (1) the employee plan has been referred by an income tax revenue agent to the IRS's EP/EO Division for examination and the EP/EO Division has agreed to conduct the examination or (2) upon the receipt of a written notice directly from the EP/EO Division that a plan has been selected for examination.

b. Aggregation. Another discomfiting aspect of section 3.03 is the potential application of the "aggregation" rule to determine whether an employer plan is under examination. Under the aggregation rule, none of the plans sponsored by a controlled group that are aggregated for purposes of qualification testing plans may be under examination. TEI believes that the procedure's reference to "aggregation of employer plans" is misleading. If the intent of the reference to "aggregation" is to require section 401(a)(4) and section 401(k) plan aggregation, the procedure should be clarified. If, on the other hand, the purpose of the reference is to require the application of the section 410(b) controlled-group aggregation rule, CEP taxpayers may, perhaps as an unintended consequence, be denied the benefit of participating in the VCR program. For example, assume a CEP taxpayer has 25 qualified retirement plans covering 50,000 employees employed among 25 different corporations and makes no election under the separate-line-of-business rule of section 414(r). Assume, as discussed above, that a CEP examiner makes a routine request for one of the group's Form 5500 series returns. Under section 3.03, such a routine request -- without any showing that the particular plan requested is defective -- will deny access to the VCR program for all of the other 24 plans. This result is inconsistent with the underlying goal of the program. TEI recommends that the IRS clarify the interaction of the "aggregation" rule with the "under examination" standard.

2. Section 3.04 - Operational Violations

Under the VCR program, only operational defects will be considered for resolution. Furthermore, section 3.03 provides that the operational defect must not have been discovered through an IRS examination. In a CEP examination, issues may be raised by the Team Coordinator or one of many specialist agents. For example, assume that, in the course of a routine CEP examination, a payroll specialist assigned to the case identifies an independent contractor issue and proposes to reclassify some independent contractors as employees. Assume further that the contractor-employees were either receiving pension payments (perhaps on account of prior service) or were entitled to a deferred vested benefit from the taxpayer. The reclassification of the individuals from independent contractors to employees will require adjustments to the individuals' pension benefits, which may thereby result in an operational defect for the employer's plan. Since the operational defect is a result of a non-EP audit adjustment, it is unclear whether correction of the defect is permissible through the VCR program. We believe it should be.

Conclusion

TEI's comments were prepared under the aegis of its Employee Benefits Subcommittee whose chair is David L. Klausman of Westinghouse Electric Corporation. If you have any questions regarding TEI's submission, please call Mr. Klausman at [phone], or Jeffery P. Rasmussen of the Institute's professional tax staff at [phone].

(1) Implemented December 21, 1990, by an IRS Memorandum from the Director of Employee Plans Technical & Actuarial Division E:EP to the Assistant Regional Commissioners (Examination), reprinted in Hildebrandt & Cowper, (ERISA) Qualified Plans IRS Determination Letter Procedures, Tax Management Portfolio No. 360, B-101 (1991).