You Found a Mistake in Your Tax Filing: Now What?

You were sure your filing with the IRS was accurate, but you double checked and found that you made a mistake. It’s tempting to stand pat and hope that the IRS won’t notice, but you know it could — and that could have negative ramifications. What to do? 

Remember that there is another option: the IRS self-correction program (SCP). The SCP is a voluntary employer-initiated program that does not involve IRS approval; therefore, the IRS will not approve a method of correction before it conducts an audit. However, Revenue Procedure 2013-12 sets forth general correction principles designed to assist a plan sponsor in determining the appropriate method of correction for a failure. 

In addition, Appendix A and Appendix B of Rev. Proc. 2013-12 provide sample correction methods for certain failures. To the extent the plan sponsor applies the applicable correction method set forth in either of these appendices, the IRS considers this correction to be reasonable and appropriate. 

Upon examination, the IRS has the right to review whether the taxpayer made the correct determination that such failure(s) were eligible under the SCP as well as whether the correction method is acceptable.

• may be formal or informal;

• must be routinely followed;

• need not be in place for a specific failure, as long as practices and procedures exist that evidence an overall effort on the part of the plan sponsor to maintain the plan in compliance with federal tax code requirements; and

• are not proven to be in place simply through a plan document alone.

• whether other failures occurred during the period being examined (for this purpose, a failure is not considered to have occurred more than once merely because more than one participant is affected by the failure);

• the percentage of plan assets and contributions involved in the failure;

• the number of years the failure occurred;

• the number of participants affected relative to the total number of participants in the plan;

• the number of participants affected as a result of the failure relative to the number of participants who could have been affected by the failure;

• whether correction was made within a reasonable time after discovery of the failure; and

• the reason for the failure (for example, data errors such as errors in the transcription of data, the transposition of numbers, or minor arithmetic errors).

This is not an exclusive list and no single factor by itself determines whether they are significant. Failures will not be considered significant merely because they occur in more than one year. In addition, the IRS will apply these factors in a way that does not preclude small businesses from being eligible for the SCP merely because of their size.

Following are examples that illustrate the application of insignificant failures. It is assumed, in each, that the eligibility requirements relating to SCP have been satisfied and that no operational failures occurred other than those identified below.

Example 1:  Employer X established Plan A, a profit-sharing plan that satisfies the requirements of IRC Section 401(a) in form. In 2012, the benefits of 50 of the 250 participants in Plan A were limited by Section 415(c). However, when the IRS audited Plan A in 2014, it discovered that, during the 2012 limitation year, the annual additions allocated to the accounts of 3 of these employees exceeded the maximum limitations under Section 415(c). Employer X contributed $3,500,000 to the plan for the plan year. The amount of the excesses totaled $4,550. Because:

• the number of participants affected by the failure relative to the total number of participants who could have been affected by the failure, and 

• the monetary amount of the failure relative to the total employer contribution to the plan for the 2012 plan year are insignificant, the Section 415(c) failure in Plan A that occurred in 2012 would be eligible for self-correction.

Example 2: The facts are the same as in Example 1, except that the failure to satisfy Section 415 occurred during each of the 2011, 2012 and 2013 limitation years. In addition, the three participants affected by the Section 415 failure were not identical each year. The fact that the Section 415 failures occurred during more than one limitation year did not cause the failures to be significant; accordingly, the failures are still eligible for self-correction.

John Iekel is Senior Writer and Editor for the ASPPA Net and NTSA Net portals.