WASHINGTON -- The IRS plans to announce changes to its voluntary compliance programs for plan sponsors shortly, according to a letter from IRS Commissioner Charles O. Rossotti.
Under the changes, the IRS will let plan sponsors rely on any of the agency's self-correcting programs, as long as they meet the requirements.
The IRS also plans in its new revenue procedure to let employers escape penalties if they have "substantially completed" most of the corrections within two years.
Mr. Rossotti's letter was in response to an inquiry from Sens. Bob Graham, D-Fla.; John Breaux, D-La.; Charles Grassley, R-Iowa; Orrin Hatch, R-Utah; Jim M. Jeffords, R-Vt.; and Max Baucus, D-Mont. The six urged Mr. Rossotti to expand ways employers can fix problems in their pension plans without risking stiff penalties or losing the tax-advantaged status. The senators also had threatened legislation forcing the IRS to make such changes if it's not done voluntarily.
Under the announced changes, pension plan sponsors will not have to worry about losing their tax advantage if they rely on any of the agency's self-correcting programs. The IRS now has the discretion to accept a plan sponsor's corrections, or ignore them, and still take away a plan's tax-favored status -- or threaten to do so.
Moreover, under the guidance the IRS plans to issue in a revenue procedure, employers will have more time to fix problems they uncover. Under the current rules, plans must make their fixes within two years. Under the new procedure, sponsors will be able to escape huge penalties or avoid losing the tax-advantaged status of their plan if they have "substantially completed" most of the corrections within two years, even if they have not finished making all of the changes. Until now, employers worried they would not be protected from penalties if they fixed most, but not all, of the problems within two years.
Mr. Rossotti's letter explained this extension only applies to "significant violations." Employers already can fix small problems at any time, without facing any sanctions.
The IRS also pledged to lower the penalties employers risk paying under the Walk-in Closing Agreement Program, in which employers present their plan corrections for errors they had made, and negotiate an agreement with the IRS that it will not take away the plan's tax-favored status. Employers literally "walk in" to IRS field offices to work out such agreements.
The IRS will issue detailed guidance on the various methods employers may use, along with examples, to fix problems at a later time.
The IRS will ask employers to study these changes and offer comments, and will revise its guidance later in the year based on these comments, according to Russ Sullivan, legislative director to Mr. Graham.
"Sen. Graham is very pleased with the responsiveness of the IRS, and with the changes (but) he withholds judgment on whether these changes will obviate the need for legislation," Mr. Sullivan said.