Bureau Of National Affairs
Tax on Prohibited Transactions Deters Compliance, IRS Says
By Leslie King
Monday, February 5, 2001
The Internal Revenue Service wants to encourage pension plans to correct prohibited transactions and comply with the law, but the excise tax imposed on prohibited transactions under Internal Revenue Code §4975 discourages plans from doing so, according to Carol Gold, Director of IRS's Employee Plans Division, Tax Exempt and Government Entities.
The excise tax under tax code Section 4975 is aimed at encouraging compliance and correction but at the same time is a disincentive to compliance because of the amount of money an employer can end up paying, Gold said Feb. 2, speaking at a program on IRS and Department of Labor pension plan audits and compliances sponsored by the American Bar Association in Washington, D.C.
Under Section 406 of the Employee Retirement Income Security Act, specific transactions between plans and parties in interests are prohibited. While the prohibited transaction rules are enforced by the Labor Department as part of the fiduciary responsibility requirements, IRS may also impose tax penalties on violators, termed "disqualified persons."
A disqualified person who participates in a prohibited transaction is subject under the tax code to an excise tax of 15 percent of the amount involved with respect to the prohibited transaction for each year in the taxable period. The taxable period is the period that begins on the date the prohibited transaction occurs and ends on the earliest of the date IRS mails a notice of tax deficiency, the date on which the excise tax is assessed, or the date on which correction of the prohibited transaction is completed. If the transaction is not corrected, the excise tax rises to 100 percent of the amount involved. To correct a transaction means to undo it to the extent possible and to put the plan in a financial position that is as good as it would have been had the transaction not occurred.
In addition to the tax penalty, ERISA allows the Labor Department to assess both criminal and civil penalties for violations of ERISA's fiduciary rules.
Section 4975 deters compliance, which IRS wants to change, Gold said, adding that there will be more compliance if there is an opportunity for resolution. Gold suggested that to encourage and ensure plan compliance, IRS should institute a system for early detection of prohibited transactions that is completely exempt from Section 4975 and that later corrections of prohibited transactions be allowed a limited exemption not subject to interest and penalties.
IRS recognizes the need to help develop a framework for the excise tax, Gold said, acknowledging the agency's responsibility to resolve the excise tax problem. The agency hopes to release guidance in the near future, Gold said, but gave no date.
Copyright © 2001 by The Bureau of National Affairs, Inc., Washington D.C