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TEI-IRS interview on Voluntary Compliance Resolution Program.

On May 10, 1993, David L. Klausman of Westinghouse Electric Corporation, Chair of TEI's Subcommittee on Employee Benefits, and Jeffery P. Rasmussen of the Institute's Legal Staff interviewed William Hulteng--Chief, Rulings Branch (Employee Plans/Exempt Organizations) for the Internal Revenue Service. The interview was prompted by the Institute's letter of February 23, 1993, regarding Rev. Proc. 92-89, which sets forth the Voluntary Compliance Resolution Program for correcting operational violations of employee benefit plans. On March 29, 1993, Timothy J. McCormally and Jeffery P. Rasmussen met with John E. Burke, Assistant Commissioner (Employee Plans & Exempt Organizations), and members of his staff, including William Hulteng, to discuss TEI's letter commenting upon VCR. Mr. Burke requested TEI's assistance in communicating the benefits of VCR and assuaging taxpayer concerns about the program. The interview which follows, provides additional information about the VCR program that may be of interest to TEl members.

The Tax Executive (TTE): Bill, as a preliminary matter, please describe for our readers the background and deliberations that lead the IRS to promulgate the VCR program.

William Hulteng (WH): The VCR program had its roots in our closing agreement program (CAP). Under CAP, we would work out a closing agreement in the field that--short of disqualification--would result in correction of the plan's qualification and a payment of a sanction amount based on a number of considerations including the tax liabilities at stake, the behavior of the taxpayer, etc. We found that we were getting a lot of walk-in business---"John Doe" business. That is, taxpayers would come to the District Office with a plan that had problems and they would approach the District through a representative on a John Doe basis--anonymously. The representative would work out the basic terms of the closing agreement with the District Office. When an agreement was reached, the taxpayer would disclose its identity, the closing agreement would be signed, and the case would be closed.

Over time, we began getting more and more John Doe cases--and we were getting comments from practitioners as well--so we decided that some sort of voluntary correction system for employee plans would be useful. In light of the CAP experience, we conceived a voluntary program where taxpayers could approach us to describe the qualification defects and we would work out correction of these defects. Under the VCR program, however, there would be no payment of a sanction or tax amount. In order to use the program there is a user fee but no tax payment. So, VCR is a product of IRS field experience with a John Doe program, plus practitioners' comments. Because it was a new approach, the IRS established the VCR program on an experimental basis.

TTE: We understand that negotiation of corrections on a John Doe basis is not envisioned under the VCR program. Is this in part a reaction to the IRS experience in the closing agreement program?

WH: John Doe is generally not the most efficient way to do things, because we are allocating resources to cases that may or may not come to fruition. So, no, you can not have a John Doe VCR submission. But we have something that I believe works just as well. That is, if you call with the question, within 15 minutes or so IRS can answer the question that you have so that you will know whether or not you want to come in with a full VCR application. So far, the cases have generally been single-issue cases--taxpayers have one issue in mind that they want to correct--so they are able to call on the telephone, and very quickly we are able to give an answer. So, even though we do not have a full-fledged John Doe VCR program, we have something that we feel works just as well.

TTE: Then you view yourself and your group as a sounding board for taxpayers to obtain feedback on an anonymous basis--taxpayers should give you a call to see what your preliminary, non-binding view is concerning the appropriate means of correction?

WH: We should end up being more than just a sounding board because, as the program continues, we are getting more experience with a wider variety of issues. By giving us a call, you will be able to tap into our experience. We have found that most phone calls last about 10 minutes and that the taxpayer knows what IRS wants to have happen. A number of current VCR submissions started in just this way.

TTE: Your telephone number is ....

WH: (202) 622-8400. [Not a toll-free number.]

TTE: Is VCR handled strictly from the National Office?

WH: It is strictly a National Office function today. You can call people at the District Office-each District has a VCR coordinator whose job is to verify the fact of correction--but the cases are administered and the decisions affecting the proper plan corrections are made in the National Office. That is where you should call.

TTE: Section 3.03 of the Revenue Procedure concerns the definition of "under examination." How does the IRS interpret the meaning of "under examination"? Specifically, how does the standard apply in the context of taxpayers under continuous examination under the Coordinated Examination Program?

WH: In its broadest sense, "under examination" is focused on an employee plan examination. If the plan has been referred to the Employee Plans Division for examination, or the taxpayer has been notified that the plan is going to be referred to the Employee Plans Division for an examination, that would kick the plan out of the VCR program. Either written or oral notification will suffice where the agent has looked the plan over and said there may be an employee plan problem, and the case is to be referred to the Employees Plans Division for full scale examination.

Concerning CEP taxpayers, I think it is fair to say that a plan will not be excluded from VCR merely because the employer happens to be under examination for income tax purposes. That would not serve the purpose of the program. In a situation where an agent said, "Yes, you have a section 415 problem, or a joint and survivor annuity issue, or a topheavy problem and this is going to the EP/EO Division for an examination"--I think that would put the taxpayer outside the scope of the VCR program. But where the employer is under a CEP examination every year and the agent is just looking at deductions or something of that order, that shouldn't kick the plan out of the VCR program. IRS is really interested in including these plans rather than excluding them. The only definitive answer I can provide is that it will be a question of all the facts and circumstances concerning whether a plan is "under examination."

TTE: That sounds good. But in CEP cases, at the opening conference, team coordinators or case managers may vaguely allude to referring the Form 5500s over to EP/EO by saying "Well, we're not sure; we'll see how the audit goes." Would that type of statement be considered oral notification?

WH: It will always be a facts-and-circumstances call. My guess is that situation would not be treated as a referral to EP/EO. There should be something definitive that the agents are going after. For example, the agents might say, "You have a section 415 problem" or, for whatever reason, "We are referring this plan and it is going to be under an EP/EO examination." There has to be something that would be a little more precise than what you described.

TTE: In many examinations, there is a set of standard Information Document Requests (IDRs) that are issued. Alternatively, agents may routinely request the Form 5500s--either because there is an examination checklist that requires the collection of the data or because the agent is following the pattern of IDRs issued in a prior examination cycle. Many times, an agent will take the produced documents and place them in a file drawer without further review. Would submitting the 5500s in response to a routine IDR constitute being "under examination"?

WH: I don't think IRS wants a situation where taxpayers are automatically ineligible for the VCR program. The National Office wants something positive happening that would indicate that an issue has been identified and is being referred, but how to draw those standards?--I just don't have a clear definition yet. You can see the thrust of what I am saying: routine requests should not kick a plan out of VCR. The National Office is looking for a situation where a potential problem is identified and the case is referred to EP/EO specialists for a closer look. In that type of scenario, the case is outside the ordinary request. IRS is looking for that type of action, but how to articulate those standards beyond the facts-and-circumstances inquiry--I don't know.

TTE: An examination of a corporation's income tax returns generally lags several years behind the most recent plan year. If, by way of example, an income tax examination is initiated for 1986-1988 and the Form 5500 of the plan year related to the income tax return year is referred to EP/EO, does the referral for the earlier plan year exclude the plan from eligibility for VCR for later plan years?

WH: If the plan is under examination for any year, it will be excluded from VCR for all subsequent years. The reason for that is that--if the plan is under examination for a particular year--the agent might decide to expand the examination to other years or other issues. So, if a plan is under examination for one issue for one year, that fact will kick the plan out for all issues for all years. For example, where an agent is examining the 1989 plan year for a joint and survivor issue, the taxpayer could not apply for VCR correction of a section 415 violation for 1990.

TTE: Suppose a payroll tax specialist identifies an independent contractor/employee issue. Does this type of examination issue constitute another facet of the "under examination" standard? There are often collateral employee benefit issues that arise when a contractor is reclassified as an employee-especially in the case of a retiree who continues in a consulting capacity for the former employer. In that situation, a retirement benefit is being paid to a current employee, which obviously is a serious problem. Another hot payroll tax issue involves payment for overtime meals. Would the raising of that issue constitute being under examination for VCR purposes?

WH: There are a lot of different issues in the independent contractor/employee area that are driven by facts and circumstances. I think the case you describe involves withholding taxes --

TTE: It starts out as a withholding tax issue, but then there is the technical plan flaw.

WH: The question would be, has the examination reached the stage where the payroll tax specialist has indicated he or she is referring the plan to the EP/EO division for examination? We are looking for a specific EP/EO examination, as opposed to a general examination of a taxpayer. Depending on the facts and circumstances the fact that a payroll tax specialist identified an independent contractor/employee issue-wouldn't necessarily exclude a plan from VCR. If, as the examination continued, the specialist said that "this raises qualified plan issues" and he or she sent a letter to the taxpayer saying that the issue was referred to EP/EO, then the plan would be outside of VCR.

TTE: Is there anyway that a taxpayer can file a VCR application before the issue gets referred to EP/EO to forestall the automatic disqualification? Suppose a taxpayer were talking to the payroll tax specialist and the specialist says "I haven't seen a true consultant the entire time I have been an agent." The taxpayer knows immediately there is a problem with the plan. Is there time for the taxpayer to file a "protective" VCR? Is there such a thing as a protective VCR submission?

WH: A taxpayer could come in then, but in the VCR program the IRS will not make a legal judgment on ancillary issues, such as whether or not someone is an employee. As another example, the IRS will not make factual or legal determination on whether a partial plan termination has occurred. The government will base its VCR ruling on the assumptions and facts provided by the taxpayer and work with the taxpayer to devise a way to find former employees to notify them of a potential additional vested benefit. On an employee/independent contractor issue, we will not make a legal judgment on whether a person is an employee or an independent contractor. The taxpayer should advise us and then we will work with the taxpayer on the appropriate correction.

TTE: As part of the settlement of the employee/independent contractor issue then, all the collateral consequences, including the effect on the plan, should be a part of an examination closing agreement or Appeals settlement?

WH: Where there is a close issue concerning employee/independent contractor status, I would ask what is being settled in the closing agreement. If only payroll tax issues are resolved, the plan would seem eligible for VCR. In order for the qualified plan issues to be resolved in a closing agreement, though, I believe EP/EO would probably be involved and, if they were involved, the case is probably not eligible for VCR. It is difficult to address these issues in the abstract. Contentious issues that involve Appeals or litigation settlements that have collateral plan consequences are probably not appropriate for resolution through VCR.

TTE: To summarize then, contingent or conditional VCR submissions are not permissible?

WH: That's correct. A taxpayer can always withdraw a VCR submission if the underlying facts or assumptions change. That is, if the employee/independent contractor issue is resolved favorably, then withdraw a submission.

TTE: Shifting from procedural issues to substantive matters, can you elaborate on the meaning of "aggregation" in the Revenue Procedure? Specifically, which section of the Internal Revenue Code underlies the reference to aggregation-section 410(b), 401(a), the separate-line-of-business rules under 414(r)?

WH: There are a number of situations where two plans might be treated as one plan for qualification purposes. Under section 410(b), a taxpayer may aggregate two plans in order to pass the coverage test. Alternatively, a taxpayer may aggregate several plans in order to meet the antidiscrimination tests of section 401(a). Wherever a plan is functionally dependent upon another plan to meet any one of the requirements for qualification, the plans should be aggregated for purposes of VCR. So, if one plan is under examination in the District, any other plan on which it depends to meet a qualification test would be excluded from VCR. As an example, if a company has two plans--a profitsharing plan and a money-purchase pension plan--and the plans independently qualify, an examination of the moneypurchase plan would not preclude the profit-sharing plan from applying for VCR correction. On the other hand, where two plans must be combined, say for purposes of meeting the section 410 coverage tests, an examination of any one of the plans prevents the other from participating in the VCR program.

TTE: Then, larger companies with multiple plans may have difficulty employing VCR.

WH: Yes, the IRS has received some comments that the aggregation rule is broader than it should be. VCR is an experimental program and the comments we are receiving will certainly be considered should we decide to modify the program. I understand your point concerning the breadth, but again, depending on the facts and circumstances of a specific case, I would recommend giving us a call to see how VCR might be adapted to accommodate the situation. For example, if a taxpayer has a small, isolated plan that perhaps is preventing a much larger plan from seeking relief under VCR, we would want to talk to that taxpayer to see if we can find a way to consider the larger plan for relief.

TTE: Related to the issue of aggregation of plans, in determining the user fee to submit with the VCR application, should a taxpayer count the total number of participants in all of the aggregated plans or only the participants of the plan for which correction is sought?

WH: I believe the proper answer is to submit a user fee based upon the number of participants in the separate plan that the taxpayer is seeking resolution of.

TTE: May an officer of a parent corporation sign the declaration for all plans in the controlled group? Or, if the plan sponsor is a subsidiary of a controlled group and no employees outside of the subsidiary qualify for a plan, should an officer of the subsidiary sign the VCR submission?

WH: Any employee duly authorized by the company maintaining the plan will have standing to submit the VCR submission. The question is, who adopted the plan? If corporation B adopted the plan and corporation A (the parent of the group) has not, then corporation B would come in and one of its employees should execute the application- In situations where both the parent and subsidiary have adopted the plan, it makes sense for one employee, probably at the parent level, to execute the application for all the members of the controlled group that participate.

TTE: Are you the only person handling the phone inquiries and applications or is someone else working with you?

WH: We have a group of about six to eight people in the Employee Plan Division handling the VCR cases, and the questions that come in will be distributed to those people to answer.

TTE: How long, on the average, is required to process a submission?

WH: It takes two to three months. A large part of that time is consumed by requests for additional information. If the method of correction makes sense, we accept proposals quickly, but we must have the specific facts, calculations, and numbers before issuing the compliance statement.

TTE: Describe how a VCR submission makes its way through the system. Are there any mistakes that recur on VCR applications?

WH: The process is similar to that for a private letter ruling. The case is assigned to an attorney who works the case. Eventually, I see all the cases because I sign the compliance statements. After a preliminary assessment of the application, I meet with the attorney on the case to see whether we agree with the taxpayer's proposed correction. If we do, we draft a compliance statement, and submit it to the taxpayer for signature. Hypothetically, we may propose an adverse resolution where we disagree with the taxpayer's submission. In such a case--just as under the private ruling process-the taxpayer has a right to a conference. In fact, we have had only one proposed taxpayer-adverse ruling, but when the taxpayer came in for the conference it persuaded us to adopt the proposed correction so the taxpayer ultimately prevailed.

I don't know if there are any recurring patterns of mistakes, but there is a lack of specificity in VCR submissions. In many cases, a VCR submission will propose a correction that is conceptually sound, but the submission lacks the calculations--the numbers, the number crunching--that we need to ensure that the correction is implemented. We need to know in full detail both the conceptual and actual correction of the plan. If we don't have it, we will go back to the plan sponsor for more information; and that typically delays the processing of the case.

TTE: Please describe your current case load and the issues.

WH: We have received in excess of 140 cases, and we have issued nearly 30 compliance statements on a variety of issues. Some cases have been closed at the taxpayer's request. Other cases were not eligible for VCR, perhaps because no determination letter was received by the taxpayer or because the submission did not pertain to a qualification issue. For example, the scope of VCR does not include violations of section 72(p) regarding plan loans, so we return all applications that are outside of section 401(a).

A number of cases have been submitted on issues that may still be corrected under the remedial amendment period. Those cases don't need VCR, so we decline to handle those cases as well. For example, plans have through 1994-- plans may amend retroactively and correct all the way through that time--for the $200,000 compensation limit under section 401(a)(17). Some plans have been submitted for correction of the section 401(a)(17) limit; we have returned them and advised the taxpayers to use the remedial amendment period.

TTE: We could use a refresher on the remedial amendment periods. Is the remedial amendment period specific to different sections of the Code or is there a general overall remedial amendment period?

WH: For qualification issues under TRA '86 provisions that became effective for years after December 31, 1988, such as section 401(a)(17), a taxpayer may correct retroactively and amend all the way through 1994. Where a TRA '86 provision was effective before January 1, 1989, however, a taxpayer is required to comply with the TRA '86 provision, even though the plan doesn't have to be amended until sometime in the future. For those types of defects, VCR would be available because the plan is required to operate in accordance with those provisions, so a taxpayer could come in under VCR for TRA '86 qualification requirements effective before January 1, 1989. A little bit convoluted.

TTE: Agreed. Of the 140 cases, are there any involving CEP taxpayers?

WH: In the past few weeks there has been a significant increase in the number of cases, so we are really encouraged ... and a number of these cases are large plans with tens of thousands of employees involved. Should that trend continue, that speaks well for the VCR program. There are probably around 15 cases involving plans with more than 1,000 employees and 5 that involve more than 20,000 employees. The large cases have developed over the last few weeks.

TTE: And the issues involved in the cases?

WH: There are four principal issues that have come in: section 415 violations, top-heavy violations, section 401(a)(9) minimum distribution violations, and section 401(k) actual deferral percentage testing violations. One caveat: everything is driven by facts and circumstances so there is no guarantee that what I describe as the typical resolution will occur in a particular case.

When plan sponsors have exceeded the $30,000 or 25 percent of compensation limits set out in section 415, several different correction approaches have been devised. One approach is to establish a suspense account for the excess contribution amount, and to use that suspense account to reduce subsequent employer contributions. The IRS prefers that the suspense account wear away quickly--a couple of years, three years at the outside. In most cases, the suspense account wears away within a year. This is a technical matter, a Treas. Reg. (section) 1.415-6(b)(6) suspense account, but it would work the same way. For employers that have moneypurchase pension plans, an alternative correction is to increase the benefits for other employees and use the excess contribution to fund the benefit, which is similar in effect to using the excess amount to offset subsequent employer contributions. Disgorgement of the excess funds is also a possible correction. Suppose that after reallocating the excess contribution amount, an excess amount remains in the plan. In that circumstance, the IRS will agree to disgorgement of the excess.

There is room for creativity in correcting plans because a plan may have several defects where corrections offset one other. For example, a plan with a section 415 defect and a section 416 defect--the excess 415 amount might be used to fund the required section 416 top-heavy contribution. In summary, with section 415 violations there are several remedies: either create a suspense account to reduce subsequent employer contributions or provide benefits to other employees or, in limited circumstances, disgorge the excess.

In the case of a section 401(a)(9) minimum distribution violation, there are two separate problems: an employer plan contribution problem and an employee excise tax problem. The statute imposes a 50-percent excise tax on employees. For the correction of the plan, employers take a straightforward approach and distribute the amount that should have been distributed together with the accumulated earnings. Employers have gone down two avenues on the excise tax though. Sometimes the employers have opted to pay the employees' excise tax obligation on their own. We have no objection to that, but it is not a condition for receiving a compliance statement. A number of other employers have decided to let their employees go on their own in attempting to obtain a waiver of the excise tax on the basis of reasonable cause. Finally, there is an option to enter into a closing agreement with the IRS to resolve the excise tax.

TTE: Would that be with the District Director?

WH: No, with the VCR program in the National Office. In this case, the employer would pay some portion of the employees' excise tax liability to resolve the issue. So far, no one has done this. In most cases, employers tell us before they apply for VCR whether they have paid the excise tax liabilities, and in most cases employers have also grossed-up the employees for the additional income tax liability. Maintaining good employee relations drives that decision.

And the last of the "big" issues is section 401(k) actual deferral percentage testing. As a correction method, the IRS will always agree to an employer making additional contributions to bring up the deferral percentage of the non-highly compensated employee group. That is IRS's preferred correction method.

TTE: The regulations suggest another option is to reduce the contributions to the highly compensated employee group.

WH: The regulations and the statute state that correction may occur either way-bring up the lower paid through the qualified non-elective contribution or by distributing from the top paid. An employer who uses the VCR program, however, has not availed itself of the statutory correction options on a timely basis. Once an employer is outside of the statutory correction period, the plan is technically disqualified. The IRS prefers that additional contributions be made to the non-highly compensated. We recognize, however, that in some cases that might cause a hardship. For example, there may be a situation where an $800,000 contribution is necessary to bring up the lower-paid group, where a $10,000 distribution to a highly compensated individual would achieve the same correction. As another example, where an additional contribution would cause bankruptcy of the employer but a distribution would not then a distribution would be accepted. The IRS's decision will depend on all the facts and circumstances.

TTE: The section 415 limits contributions seem straightforward and plans have a full year to make self-help corrections. How are the errors occurring? Are employers failing to test?

WH: Defects arise for a number of reasons. Some employers fail to test, sometimes a computer program is flawed; misclassifications of employees in the highly or non-highly compensated groups is a common error. There seems to be a different reason for each case.

TTE: VCR is a temporary program scheduled to expire at December 31, 1993. What would persuade the IRS to extend the VCR program? If it were extended, would it continue to be administered at the National Office, or would it move to the District level?

WH: The VCR program is a new approach to employee plan enforcement--really a wholly new approach for any IRS enforcement program. As an experimental program, we want to see how it works, what works well, what needs adjustment. No decision has been made yet on continuing the program. The IRS is evaluating the program. Beyond that, I can't say.

TTE: The VCR program requires full correction, back through and including closed years. Furthermore, corrections may require distributions to or collections from terminated employees. What is the likely result where participants have terminated employment and the taxpayer is unable to locate them? Will this prevent issuance of compliance statements? What happens when an employer is unable to locate, say, 10 out of 2,000 ex-employees?

WH: The VCR program does require full correction, including closed years. In our view, an operational violation disqualifies a plan permanently until the operational violation is corrected. We realize that perfect correction may be impossible in some circumstances. There will be situations where ex-employees cannot be located. In those situations, we will look at the methods used by the plan sponsor to find the employee. Where the employer makes a diligent effort to locate or notify ex-employees, that will be sufficient for VCR purposes. Under the closing agreement program, we have found that there are mechanisms for finding employees, or notifying employees that there may be additional benefits owed to them. We have used such methods as requiring employers to search all of their available records, newspaper notices, workplace postings, notifying the union, and notifying the Social Security Administration. Also, the IRS has an anonymous letter-forwarding service. As of the previous April 15, every person that filed an income tax return provided the IRS with an address. Assuming the employer retains the employee's social security number, the employer can provide that to the IRS, together with a letter from the employer notifying the employee of the benefit; the IRS will forward that letter to the employee. Obviously, under the non-disclosure laws, the IRS cannot inform the employer whether the employee has been found or what the address for the employee is, but employing that process will be satisfactory for VCR. If the employee does not claim his or her benefit--well, the employer has done everything possible.

TTE: What does the employer do with the money in the plan for the unlocated ex-employees?

WH: I don't believe we have any specific guidance on that one.

TTE: But a taxpayer isn't automatically out of VCR because the money is still in the plan?

WH: No, correction is still possible. IRS will come up with an alternative for the excess funds. Perhaps a suspense account should be created, but it depends on the facts and circumstances.

TTE: A similar issue arises with respect to obtaining a spouse's waiver of joint and survivor benefits. It is possible that a waiver was not obtained at the proper time. WH: IRS will require the plan sponsor to take appropriate steps to obtain spousal waivers wherever possible. Whatever is reasonable in the circumstances should be done to locate the person to obtain the required signatures, but obviously IRS does not expect the impossible.

TTE: Will the IRS publish suggested corrections to provide guidance to taxpayers? Drawing on your previous analogy, will the IRS publish redacted rulings similar to the private ruling process?

WH: That suggestion has been made by a number of groups---- that we should use the experience gained from our cases to publish recommended correction scenarios for different types of defects. That is one idea under consideration as we review the VCR program.

TTE: Does the IRS interact with the Department of Labor at all? Specifically, will the information submitted in connection with the VCR be shared with DOL? And, finally, is the decision to share information affected by the resolution of the case?

WH: There is no interaction between DOL and the IRS under VCR. In the event a case is referred over to EP/EO examination because there was no agreement on correction, then there would be coordination with DOL.

TTE: The Revenue Procedure provides that plans that have flagrant, deliberate, or repeated violations are not eligible for VCR. Has the IRS rejected any cases on this basis?

WH: No, and I doubt that any case will be rejected on this basis. That language was put in the procedure because VCR is an experimental program and we weren't sure what we would get. As a practical matter, that language should not cause trouble to any employer anywhere, on any case. There is a practical reason why I am so confident of that: in order to participate in the VCR program, the employer had to obtain a favorable determination letter. Any company that obtained a determination letter is conscientious and unlikely to have repeated, deliberate, or flagrant violations. No one should worry about that. The purpose is to obtain plan correction, so I doubt that anyone will be rejected on the basis of repeated, deliberate, or flagrant violations.

TTE: Have any cases been submitted that involve multiple operational violations within the same plan?

WH: Most cases have involved single issue defects. There was a case with 12 different defects arising in different plan years and we are working out the various corrections. The repeated, deliberate, flagrant phrase has had a chilling effect on taxpayers coming in. That is unfortunate because it wasn't intended that way. With an experimental program, the IRS wanted to be a careful. Again, as a practical matter, that phrase will not come into play. If there are plans with operational violations, come in and we will deal with it.

TTE: When, if ever, will an excise tax be levied as a result of VCR corrections?

WH: The VCR program deals solely with qualification issues. Excise tax issues will arise under VCR only in connection with correction of section 40 l(a)(9) issues--where there is an opportunity for closing agreement. Also, section 401(k) corrections may involve excise taxes should the employer desire to resolve the issue on behalf of the employee. Aside from those circumstances, the excise tax obligations arise as they normally would and would not be affected by VCR.

TTE: When, if ever, will the IRS expect a plan sponsor to pay the income tax on consequences of the employee participants?

WH: I doubt that IRS would ever require that as part of VCR. There have been situations in the section 401(a)(9) area where employers have voluntarily paid the excise tax liability of the employee. Again, that is up to the employer. That is not a condition of VCR. The VCR program is not intended to collect tax; the VCR program is intended to restore plans to a tax-qualified status.

TTE: What else should the taxpayer consider when submitting a request? Do you have any other closing thoughts or advice for TEI members?

WH: The IRS needs specificity in the submission concerning the plan of correction. Also, taxpayers are often concerned about the cost of correction--if they come into VCR, it will cost them money--and sometimes they seem to think that if they don't come into VCR, they don't have to worry about that cost of correction. From the standpoint of a qualified plan, though, taxpayers should remember that the cost of correction is always present--so there is no additional cost. Left uncorrected, the plan remains disqualified and eventually that will cost some amount.

Where a taxpayer attempts self-help te correct a plan without coming in under VCR, two separate risks arise. First, the taxpayer may re-qualify the plan on a prospective basis, but for the "bad years" the plan remains disqualified. Second, a taxpayer attempting self correction without benefit of a compliance statement runs the risk that the IRS won't agree with the correction that is implemented. The taxpayer, in effect, may have incurred a cost of correction without achieving the goal of actual correction. By coming in under VCR, a taxpayer has the opportunity to save the tax subsidy for prior years from plan qualification and also to obtain comfort that the implemented correction will be honored by the IRS.

With CAP, with the administrative policy on sanctions, and now with VCR, the IRS has attempted to mitigate the harsh consequences of plan disqualification. The statutory provisions are strange in that, if a plan violates a qualification requirement, the sanction is like falling off a cliff. There is no middle ground. What the IRS has tried to do with the administrative policy on sanctions, the closing agreement program, and VCR is to turn that cliff into a slope so that remedies are graded and proportional to the violation.

Finally, there have been some reports in the tax journals that VCR is a fishing expedition for referrals to EP/EO examination. Let me state unequivocally that that is not our intent. Plan correction and restoration to qualified status is the goal. The fact of the correction under VCR is not passed back to the EP/EO examination office. The District VCR coordinator will monitor and review the extent and degree of compliance with the VCR compliance statement.

TTE: Thanks, Bill.
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Title Annotation:IRS official William Hulteng
Author:Rasmussen, Jeffrey P.
Publication:Tax Executive
Article Type:Interview
Date:May 1, 1993
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