This year alone, the Department of Justice has obtained two guilty pleas for criminal charges for failure to file the Form 5500. On February 27, 2008, a former owner of a Manhattan-based company plead guilty to failing to file a tax return for an ERISA employee benefit plan. As part of the plea agreement, the owner agreed to pay restitution of $30,693.06 within one year. He is currently awaiting sentencing for which he faces a minimum of one year in prison. On April 8, 2008, the President of a North Carolina construction company was sentenced to a one year term of federal probation and ordered to pay $138,478.80 in restitution, a $5,000 fine, and up to $10,000 for successor trustee administrative fees for making a false statement on the profit sharing plan’s Form 5500.
The failure to file or to accurately file a Form 5500 for your retirement plan has several consequences. Here we address two issues that you should be aware of: (i) what happens if you do not file the Form 5500; and (ii) what you can do now.
What happens if you do not file the form 5500 or fail to file an accurate form 5500?
The Internal Revenue Service (“IRS”) can impose penalties of $25 per day, up to a maximum of $15,000, for failure of a pension plan to file a Form 5500 or a Form 5500-EZ. However, the Department of Labor’s (“DOL”) penalties are different and can be much larger. The DOL penalties can reach amounts of up to $1,100 per day, with no maximum, for failure to file a Form 5500. These penalties are applied to pension, welfare and/or welfare/fringe benefit plans, excluding plans that file the Form 5500-EZ.
For willful violations, and as the owner and President of the construction company found, courts have the discretion to impose severe criminal penalties (up to $500,000 for corporations) and even imprisonment. This discretion is based on the facts and circumstances. Realistically, most of the cases also involve egregious facts, such as embezzlement of plan money.
What can you do now?
Before the DOL or the IRS contacts you, file your delinquent annual reports immediately. Under the DOL’s Delinquent Filer Voluntary Correction (“DFVC”) program, you can file delinquent Forms 5500 and pay a reduced civil penalty. Information about the DFVC program can be found at the DOL’s website at: http://www.dol.gov/ebsa/FAQs/faq_DFVC.html.
In short, don’t treat the filing of the Form 5500 lightly ... the consequences can be dire.
Disclaimer Required by IRS Rules of Practice:
Any discussion of tax matters contained herein is not intended or written to be used, and cannot be used, for the purpose of avoiding any penalties that may be imposed under Federal tax laws.