Rev. Proc. 98-22, relating to the employee plans compliance resolution system.

• Position: IRS Revenue Procedure 98-22

On June 25, 1998, Tax Executives Institute submitted the following comments on Rev. Proc. 98-22, relating to the Internal Revenue Service's consolidated Employee Plans Compliance Resolution System. The comments took the form of a letter from TEI President Paul Cherecwich, Jr. to Commissioner of Internal Revenue Charles O. Rossotti. The comments were prepared under the aegis of TEI's Federal Tax Committee, whose chair is David L. Klausman of Intel Corporation, and its Employee Benefits Subcommittee, whose chair is Mitchell S. Trager of Georgia-Pacific Corp.

On behalf of Tax Executives Institute, I am pleased to submit the following comments on Revenue Procedure 98-22, which sets forth the Internal Revenue Service's consolidated "Employee Plans Compliance Resolution System" (EPCRS). Section 1.05 of the procedure generally requests comments on Rev. Proc. 98-22 and the administration of EPCRS and specifically requests (1) comments regarding the extent to which a fixed (as opposed to an indefinite) self-correction period encourages prompt, voluntary correction and (2) suggestions for items that should be included in forthcoming guidance on permissible correction methods.

Background

Tax Executives Institute is the principal association of corporate tax executives in North America. Our more than 5,000 members represent the 2,700 leading corporations in the United States and Canada. TEI represents a cross-section of the business community, and 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 government alike. As a professional association, TEI is firmly committed to maintaining a tax system that works -- one that is administrable and with which taxpayers can comply.

Members of TEI are responsible for managing the tax affairs of their companies and must contend daily with the provisions of the tax law relating to the operation of business enterprises. We believe that the diversity and professional training of our members enable us to bring an important, balanced, and practical perspective to the issues raised by Rev. Proc. 98-22, relating to the Internal Revenue Service's consolidated employee plans compliance resolution system.

Overview

TEI believes that the consolidation of the Internal Revenue Service's procedures and pronouncements on various self-correction programs in the comprehensive fashion set forth in Rev. Proc. 98-22 holds great promise for improving qualified plan compliance. TEI supports the IRS's efforts to devise equitable enforcement programs and procedures that balance the rights and expectations of plan beneficiaries and plan sponsors as well as the government's legitimate interests in regulating the administration of qualified plans. We applaud the release of Rev. Proc. 9822 because we believe that EPCRS and certain of the substantive changes made to the prior procedures and pronouncements cannot help but foster one of the primary purposes of the plan qualification process: to encourage employers to adopt and maintain retirement plans for their employees. In order to promote the prompt, voluntary correction of violations of the complex laws and regulations governing qualified plans once violations are discovered, disqualification should rarely (if ever) be a consequence of such violations. Instead, the consequences of a violation should be proportionate to that violation. As important, IRS guidance should provide certainty concerning the costs that will be incurred if the employer voluntarily discloses and corrects the defect.

Thus, although TEI believes that the IRS's replacement of the indefinite sanctions under the Walk-in Closing Agreement Program (Walkin CAP) with a defined range of compliance correction fees represents an improvement over the prior procedure, we submit that the relief provided to employers by the revenue procedure does not go far enough in the following general areas:

* conforming the IRS's administration of the tax laws relating to qualified plans to general statute of limitations principles and the administration of other provisions of the Code;

* recognizing the difficulty of administering plans to maintain zero defects and the tremendous cost and burden placed on employers with old, complicated plans;

* providing workable safe harbors and guidance about how failures should be corrected (including a procedure permitting limited retroactive amendments of plan documents to conform to the actual operation of the plan, especially where participants benefit from the plan's operation in a nondiscriminatory fashion); and

* limiting the discretion of the IRS's field agents under the Audit Closing Agreement Program (Audit CAP) to disqualify plans or to impose punitive sanctions on employers in respect of plans containing operational or other failures and prescribing sanctions proportionate to the defect.

TEI believes that if the IRS revises the revenue procedure to make the consequences of a violation proportionate to such violation, to permit flexible corrections that are not unreasonable, and to provide certainty about the forms of acceptable corrections, employers will be further encouraged to adopt and maintain plans and to correct failures voluntarily and promptly when they are discovered. The following comments and suggestions address more specifically the concerns summarized above.

Sanctions Are Inappropriate in Certain Circumstances

Section 15.01 of Rev. Proc. 98-22 states that sanction amounts under Audit CAP "will not be excessive and will bear a reasonable relationship to the nature, extent, and severity of the failures." A list of the factors the IRS will consider in fixing the amount of the sanctions is provided in section 15.02. While these general policy pronouncements are welcome, we recommend that the IRS explicitly confirm that sanctions will not be imposed for unintentional, minor, or non-egregious errors. Consistent with tax law principles that generally impose penalties only in cases involving intentional disregard of the tax laws or fraud, sanctions should apply only to egregious qualification failures attributable to gross negligence or fraud. Furthermore, even where the IRS believes sanctions are appropriate, Rev. Proc. 98-22 should be revised to acknowledge that, in many cases, the correction itself constitutes a sufficient sanction. For example, if an employer corrects the failure to notify certain employees of their right to participate in a 401(k) plan by making contributions to the plan on behalf of such employees, such contributions -- which the employer would not have been required to make had the employees been afforded the right to participate -- should be deemed a sufficient sanction. Similarly, additional profit-sharing contributions to the accounts of such employees constitute a sanction in and of themselves because either (1) the company would have made the same dollar amount of contribution (but allocated its original contribution over a larger group of participants) where the plan is based on a fixed dollar amount of profit-sharing contribution or (2) the same percentage-of-compensation contribution will inure to all employees (following the added contribution) where the plan is based on a percentage-of-compensation formula.

In the limited...