IRS official outlines developments in EP Examinations of retirement plans in U.S. territories

For fiscal year (FY) 2013, the IRS Employee Plans (EP) Division is continuing its program of conducting large case examinations of employee plans in the U.S. territories, Charlie Petrasanta, senior actuary, IRS Tax Exempt and Government Entities (TE/GE) International, said during a March 21, 2013 IRS phone forum on retirement plan issues in the U.S. territories. Large case examinations generally involve corporations with more than 35,000 employees that filed a Form 5500, Annual Returns/Reports of Employee Benefit Plan, bearing a foreign address, Petrasanta explained.

Two projects completed

The IRS Employee Plans Compliance Unit (EPCU) has completed the two projects it launched in 2010. The EPCU develops compliance projects and performs data analysis to focus on areas of potential noncompliance. Generally, inquiries are issued to taxpayers through correspondence by telephone or mail.

The first completed project, Petrasanta explained, involved sending compliance letters to more than 300 employers whose employer identification number (EIN) began with the number 98. By doing this, the EPCU wanted to see whether it is possible to determine the total number of existing domestic trusts maintained by foreign entities from the employer’s EIN. “The results of the project showed that employers with an EIN beginning with 98 are not necessarily domestic trusts maintained by foreign entities,” Petrasanta said. However, he stated that most of these employers did have some foreign connection.

The second project the EPCU completed involved foreign distributions from retirement plans. The EPCU contacted more than 280 individuals with an address outside the U.S. or in a U.S. territory, who had received a distribution from a retirement plan or IRA and who may not have reported the distribution or paid the 10% early distribution tax under Code Sec. 72(t). The EPCU asked these individuals to provide information to determine whether they properly included the distribution, as reported on the Form 1099-R issued to them, on their tax return and paid the correct tax due, if any. Petrasanta said that “responses received showed it was difficult to get a complete picture of the characteristics of global U.S. persons in the sample because of difficulty in locating them.” He explained that global U.S. persons are extremely mobile and tend to move between an address in the U.S. and another in a foreign country during the year or for years at a time.

Nevertheless, every responding individual confirmed receipt of an early distribution. The respondents also indicated noncompliance with reporting and payment requirements related to the Code Sec. 72(t) tax existed for several reasons. Petrasanta clarified that these reasons included ignorance on the part of global U.S. individuals that they owe tax on their worldwide income and also ignorance of payors, employers, and tax return preparers regarding U.S. filing, withholding, and reporting requirements, which included the Code Sec. 72(t) tax.

Source: IRS phone forum, March 21, 2013.

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer’s Benefits Reports.

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