Section 6701 penalty applied once per plan application

Plain-English summary

An employee-plan professional submitted false Forms 5307 and supporting documents for multiple retirement plans, causing sponsors and participants to claim tax benefits from plans that were not actually qualified. Chief Counsel advised that one false document supports only one section 6701 penalty, even if it causes many taxpayers to understate tax. Section 6701(b)(3) further limits the IRS to one penalty for all false documents connected with a single plan’s qualification application. The statute does not require assessment for a particular tax year, although IRS practice is to identify the penalty with the year the false documents were prepared or presented.

Ruling snapshot

• Question: How many section 6701 penalties could the IRS assess for false plan-qualification documents, and to which year should they be assigned?
• Outcome: Advice to assess one penalty per plan application and use the submission year for internal processing
• Key authorities: IRC § 6701; Treas. Reg. § 301.6203-1; Berger; Kuchan; Mattingly

Full text (IRS public release)

Office of Chief Counsel
Internal Revenue Service
memorandum
Number: 201531015
Release Date: 7/31/2015
CC:PA:02:EMISHORY
POSTN-109328-15

UILC: 6701.00-00

date: June 2, 2015

to: Mark Pfeffer
Acting Area Counsel – Gulf Coast Area
(Tax Exempt & Government Entities Division Counsel)

from: Ashton P. Trice
Chief, Branch 2
(Procedure and Administration)

subject: Questions regarding aiding and abetting penalties under I.R.C. § 6701

This Chief Counsel Advice responds to your request for assistance. This advice may
not be used or cited as precedent.

ISSUES

1. When a person submits a false document to the Service in support of a
   retirement plan’s application for qualified status, may the Service assess a
   section 6701 penalty for aiding and abetting understatement of tax liability
   against the person for each taxpayer (for example, the plan’s sponsor and each
   of the plan’s participants) who relied on the erroneous qualified status to claim
   improper deductions?
2. Can the Service assess a separate section 6701 penalty for each false document
   the person submitted to the Service as part of a plan’s application?
3. For which year should a section 6701 penalty be assessed?

CONCLUSIONS

1. No. The Service can assess only one section 6701 penalty against the person
   for submitting a false document, even if the document results in multiple
   taxpayers understating their tax liability.

2. Under section 6701(b)(3), the Service can assess only one penalty for all false
   documents that relate to a single plan’s application for qualified status.
   POSTN-109328-15 2

3. Section 6701 does not require the Service to assess the penalty for a particular
   taxable year. The Service’s internal procedures identify the assessment with a
   specific year to satisfy computer programing requirements and the Service has a
   general practice of identifying an assessment of the section 6701 penalty with the
   year that the false document was submitted to the Service.

Facts

For certain sponsored retirement plans to obtain qualified status, the plan’s sponsor
must apply for qualified status with the Service. For certain plans, the application may
be made on a Form 5307, “Application for Determination for Adopters of Modified
Volume Submitter (VS) Plans.” Under various circumstances, these applications,
including supplemental documents, have to be filed with the Service by a specific date.
A plan sponsor’s representative may make the required submissions on behalf of the
plan’s sponsor. A plan’s qualified status gives tax advantages to the plan’s sponsor and
beneficiaries.

In conjunction with a promoter examination, the Service identified an employee plan
professional who submitted a series of false documents to the Service in the course of
his representation of multiple plans. The false documents included Forms 5307 that
were used to apply for qualified status, and in many instances also included documents
that were submitted to supplement the applications. As the applications were false, the
plans were not actually qualified. The plans’ sponsors and beneficiaries treated the
plans as qualified, and as a result, they understated their tax liabilities. The Service
wishes to assess penalties under section 6701 against the employee plan professional
who filed the false documents.

LAW AND ANALYSIS

Section 6701 imposes a penalty for each false document that a person helps prepare or
present if, (1) the person knows or has reason to believe that the document will be used
in connection with any material matter arising under the internal revenue laws, and (2)
the person knows that use of the document would result in an understatement of the tax
liability of another person. Filing false Forms 5307 and related documents can support
liability for a section 6701 penalty. See Berger v. United States, 87 F.3d 60, 64 (2d Cir.
1996) (holding that filing a false Form 5300, “Application for Determination for Employee
Benefit Plan,” can support liability for a section 6701 penalty).

The section 6701 penalty applies with respect to each false document a person helps
prepare or present. I.R.C. § 6701(a) (“shall pay a penalty with respect to each . . .
document”). As such, the Service may assess only one section 6701 penalty per false
document, even if one false document results in multiple taxpayers understating
income. See Kuchan v United States, 679 F.Supp. 764, 767 (N.D. Ill. 1988) (upholding
the assessment of 191 section 6701 penalties only because plaintiff prepared a
transmittal letter attached to, and referencing 191 false Schedule C’s, not because 191
POSTN-109328-15 3

taxpayers understated their tax liability). In Berger, the Service assessed a section
6701 penalty for each tax year that was affected by a false Form 5300. Berger v.
United States, 79 A.F.T.R.2d 97-2547, at 2 (Apr. 11, 1997). The court held that
section 6701 only imposes a penalty per false document, not per tax year affected. Id.
at 5. Similarly, section 6701 penalties are not imposed per taxpayer affected. In this
case, the number of section 6701 penalties cannot exceed the number of false
documents that the person prepared, even though each false application resulted in
multiple taxpayers understating their tax liability.

In some cases, the number of penalties the Service can assess may be less than the
number of false documents a person helped prepare or present. Under section
6701(b)(3), only one penalty can be assessed against a person for all of the false
documents that relate to (1) the same taxpayer, and (2) the same taxable period or
event, even if the documents were prepared or presented in different years. The
Service may assess separate section 6701 penalties against a person for helping
prepare or present false documents relating to different taxpayers, even though the
documents relate to the same period or event. Mattingly v. United States, 924 F.2d
785, 793 (8th Cir. 1991). In Berger, the Service determined that an employee plan
professional submitted multiple false Forms 5300, Forms 2848 and other document as
part of twenty-three employee plans’ applications for qualified status. 87 F.3d at 61-62.
The Service assessed section 6701 penalties based on the application, not for each
false document submitted, and the court noted that the number of section 6701
penalties could not exceed the number of Forms 5300 submitted. Berger, 79
A.F.T.R.2d 97-2547 *5. Similarly, here, all the documents were prepared with respect
to the Forms 5307 and it was the false Forms 5307 that resulted in the understatements
of tax. Therefore, in this case, the Service may assess one section 6701 penalty for all
false documents that relate to a particular plan’s application for qualified status.

Treas. Reg. § 301.6203-1 states that records supporting an assessment shall identify
“the taxable period, if applicable… .” As the court in Kuchan noted, section 6701
contains no provision fixing the year for which the penalty must be assessed. 679
F.Supp. at 767. While the court in Kuchan noted that it was logical for the section 6701
penalty assessment to be associated with the year in which the prohibited conduct
occurs, it did so in the context of rejecting Kuchan’s argument that the Service erred in
not assessing the penalty for the year to which the underlying documents related, and
Kuchan does not require that the penalty be assessed for a particular year. 679
F.Supp. at 767. Further, there is no statute of limitation on the assessment of section
6701 penalties and the penalty can be assessed at any time. See, e.g., Mullikin v.
United States, 952 F.2d 920, 926-28 (6th Cir. 1991); Kuchan, 679. F.Supp. at 768. To
the extent that the Service’s internal procedures require assessing the penalty for a
particular year to satisfy computer programming requirements, the Service’s practice is
to use the year that the false documents were prepared or presented.
POSTN-109328-15 4

This writing may contain privileged information. Any unauthorized disclosure of this
writing may undermine our ability to protect the privileged information. If disclosure is
determined to be necessary, please contact this office for our views.

Please call (202) 317-6844 if you have any further questions.