This article focuses on a ROBS IRS audit. There are two ways a ROBS setup can be audited: a DOL audit or an IRS audit. The previous blog focused on DOL audits.
Navigating the IRS audit process looks as complicated as, oh, following a complicated flow chart that seems to loop just as you think you are nearing completion. Fortunately, when a ROBS arrangement is set up and maintained properly, you spend your time having fun and making money with your business, not looking over your shoulder. We also know exactly what the IRS looks for in an audit.
ROBS IRS Audit Issues – Overview
The two best sources for understanding the IRS mindset in an audit are:
From these sources we know that the top issues for a ROBS IRS audit include:
- timely and correct Form 5500 filings
- corporate stock valuations
- following the contribution and distribution rules
My experience is that the IRS wants to help plans move into compliance if they are not, and leaves them alone if they are. Just stay in compliance, which is usually as easy as finding a good third party administrator (TPA).
ROBS IRS Audit Issues – Form 5500
A 401K plan that contains qualified employer securities (QES) must file a full 5500 and the appropriate schedules no matter the size of the plan. Your TPA does this for you. Yes, it is an added business expense. Yes, it is required and failing to do so is a huge deal. Other than cost, why do some ROBS owners not file? This is from the IRS itself:
“We determined that a large reason many sponsors in the sample were non-filers was because they and their advisers were incorrectly interpreting an exemption to the Form 5500 series filing requirement which does not apply to ROBS plans. The filing exemption only applies if assets are less than a specified dollar amount ($250,000) and the plan provides deferred compensation solely for an individual or an individual and his or her spouse who wholly own a trade or business, whether incorporated or unincorporated. However, in ROBS arrangements, the plan rather than the individual owns the trade or business. Therefore, this filing exemption does not apply and the annual Form 5500 return is still required. Form 5500 series returns were solicited as appropriate and taxpayers were advised regarding the correct filing requirements by use of the following caveat:
Please be advised that as long as your qualified retirement plan and related trust are in existence, certain plan administration actions need to be taken in order to keep your plan qualified. These actions include ensuring that the plan is in compliance with all of the plan qualification requirements of Internal Revenue Code section 401(a) and all related Regulations. These actions are necessary until the plan is terminated and all trust assets are distributed. In addition, upon plan termination a final Form 5500 – Annual Return/Report of Employee Benefit Plan – must be filed. This is required even if you were exempt from filing a Form 5500-EZ in previous years.
ROBS IRS Audit Issues – Contributions, etc
Let’s say you want to contribute part of your annual salary to the 401K plan. Perhaps you write your own paychecks. So you take $10,000 of company money, add it to the 401K plan. Good enough? No.
The $10,000 needs to show up as salary on your W2 as deferred comp, needs to show up properly on your corporate financials, needs to show up on the 5500 as a contribution, money is tracked by the plan admin for your benefit (401K funds are always tracked for the benefit of the specific employee, even if they are in the same account).
Bottom line is follow the rules and you will be fine. Don’t know the rules? You should know the basics, but finding a good CPA and plan admin leaves you with having fun and making money. Which is why you got into business in teh first place, right? Not filing IRS forms.