Moving Back to the Future by Enhancing a Modest IRS Pilot-Compliance Program That is Limited to Owner-Employee Plans and Foreign Deferred Compensation Plans

The Internal Revenue Service (“Service”) recently issued Revenue Procedure 2014-32. The Procedure announced a penalty-relief program (the “Pilot Program”) for those retirement plans that are not subject to the ERISA reporting requirements, but subject to the Code reporting requirements. In particular, the administrators and sponsors of foreign plans maintained primarily for non-resident aliens, and of domestic plans limited to owner-employees, may avoid failure to file penalties if their plans qualify for the Pilot Program and make the delinquent filings between June 2, 2014 and June 2, 2015. This article reviews the evolution of the taxation rules applicable to deferred compensation plans, the evolution of the annual reporting rules for such plans beginning with the pre-ERISA rules, and the permanent compliance programs of the Internal Revenue Service (the “Service”) and the U.S. Department of Labor (“DOL”) with respect to the ERISA and Code rules pertaining to tax qualification, prohibited transactions, and annual reporting. The article offers suggestions to (1) improve the Pilot Program, and (2) implement a permanent version of the Pilot Program that would be most effective if integrated with the existing permanent compliance programs. The article also offers three suggestions about reporting improvements, many of which were previously implemented, but are no longer in use. First, sponsors of foreign plans maintained primarily for non-resident aliens and of domestic plans limited to owner-employees should provide more information on their respective annual U.S. income-tax returns about their plan contributions and distributions. Second, the Service should issue separate 5500 forms for the different kinds of non-ERISA plans required to make such filings. These forms could request items that the Service needs to monitor effectively the distinct tax compliance issues raised by the different kinds of plans. Third, the Service’s reporting regulations should be revised to be consistent with its practices, whether it be to require annual Form 5500 reports from Code Section 403(b)(1) plans or from unfunded plans. However, annual reporting by unfunded plans, whether foreign or domestic, is not a very effective way of encouraging tax compliance from the sponsors or beneficiaries of such non-qualified plans