How We Got to the APRS and Audit CAP: The Insider's Story

There was a single case that came to the National Office in 1989 that resulted in the IRS’s first voluntary compliance program that allowed for self-correction of operation failures, the Administrative Policy Regarding Correction (APRS). It was a technical advice case and found its way later on as example 1 in the original APRS.

In a nutshell this plan was in compliance for 13 years, received all necessary favorable determination letters, had a vesting schedule that was beneficial to the nonHCEs, contributions were made regularly and timely, the plan sponsor hired a professional plan administrator to ensure compliance, and there were never any operational failures. However there was one operational failure in 1985 that was caused when the plan administrator failed to make a check mark to identify one key employee with compensation in excess of $200,000. In addition, when the error was self-corrected by the plan administrator, it was done prior to the plan examination. In all respects - and I remember this plan very well 13 years later - this was a model for proper plan administration at the time.

If we disqualified the plan the tax consequences would have been staggering. After the conference - in which the attorneys for the plan sponsor laid out an excellent presentation - I realized that this case was no different from many others where we disqualified the plan or entered into a closing agreement under DO 97.

I discussed this case with Jack Riddle 9/ who worked for me as a reviewer and we were both of the mind that if there was ever a plan that should not be disqualified, this was it.

That week I called Marty Slate and Bill Posner and asked for a meeting to discuss this case. My view was that the EP Division should develop programs - coordinated with the KDOs so that the IRS on a nation-wide basis would be following the same structure - that would (1) maintain a plan's qualified status, (2) force correction, and (3) on some basis impose a dollar sanction that was proportionate to the nature of the disqualifying failure. Marty and Bill were not ready for that leap. However they told me to write up the technical advice memorandum with one sentence only saying that the plan should not be disqualified. Then they said that we would follow up the memorandum with a call to the KDO explaining our action. So while the seed for the APRS was planted, it had not yet taken shape.

I wrote up the technical advice and a detailed file memorandum. At a later meeting with Chief Counsel's Tax Litigation Division in early 1990 I again argued for specific programs rather than a single technical advice memorandum to change overall policy in retroactive disqualification cases. It was at this meeting that the APRS was born. David Mustone, 9/ Tax Litigation counsel, offered up the idea of a nonenforcement policy under the IRS litigation guidelines which allowed the IRS the discretion not to enforce a tax liability even though liability existed. Dave gave us exactly what we needed to develop programs rather than just issue a single technical advice memorandum that would not have any impact beyond the particular taxpayer.

From this meeting I began drafting what was later issued in April 1990 as the APRS. I had read the IRS Tax Litigation Division's recent victories in Buzzetta Construction Company 10/ and Martin Fireproofing 11/. These cases affirmed the IRS's discretion to retroactively disqualify plans notwithstanding inadvertence, relatively minor failures, and otherwise competent plan administration. I suggested that my drafting of a nonenforcement policy follow the Courts' opinions in these cases. Bill Posner pulled me aside after the meeting and made it quite clear that whatever I drafted should not give away anything earned in those cases.

A reading of the original APRS - which was finalized by Bill Hulteng 12/ after I left the IRS - clearly demonstrates that it was very narrowly drafted and gave nothing away. In fact the APRS was so narrowly drafted, it was virtually useless. Its real value was that it opened the door to later programs-- the Voluntary Compliance Resolution Program (VCR) Program in 1992, Walk-in CAP in 1994, the TVC Program for 403(b) plans in 1997, and the eventual overhaul of all these programs into the first issuance of the EPCRS in 1998.

At the time the APRS was being drafted, Mary Jo Fite of the Employee Plans Division and myself collaborated on what was later issued as the Employee Plans Closing Agreement Program (Audit CAP) to handle those retroactive disqualification cases discovered on audit.

Final Thoughts

That is the genesis of the EPCRS.

It took courage on the part of Marty Slate and Bill Posner to overcome their own adherence to disqualification as the appropriate and only sanction for plan failures; and to approve such a dramatic shift in policy that allowed the nonenforcement of plan disqualification failures. They were simply the right people to make this decision for the IRS.

It took the good fortune of having Dave Mustone at the right meeting to focus in on the concept of a nonenforcement policy so that we could institute real policy and program changes.

And I have to admit to my own personal satisfaction that I conceived the notion to create programs in which the IRS could walk away from decades of narrow policy of technically disqualifying every plan that had a form or operational failure; pursued my vision in the face of opposition; and later drafted and collaborated on the first two IRS programs that allowed a substitute for plan disqualification.

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Footnotes

1/ The Employee Plans Closing Agreement Program is "Correction on Audit (Audit CAP)" under the EPCRS. Rev. Proc. 2002-47, Part VI, secs. 13-14

2/ The old APRS has gone through many changes over the years. In the current version of the EPCRS, the old APRS is known as the "Self Correction of Insignificant Operational Failures" and the "Self-Correction of Significant Operational Failures." Rev. Proc. 2002-47, Part IV, secs. 7-9.

3/ The key district office set-up no longer exists.

4/ The IRS National Office is now referred to as the IRS Headquarters Office.

5/ Truly minimal can not be defined; only experienced.

6/ In 1987 about 5,000 plan audits were conducted in the KDOs. That figure increased to about 35,000 in the 1989 and 1990 fiscal years. In 1991, 27,019 audits were conducted; in 1992-29,622 audits; in 1993-31,605 audits; in 1994-28,479 audits; in 1995-19,182 audits; in 1996-14,126 audits; in 1997-19,567 audits; in 1998-20,065 audits; in 1999-14,006 audits; and in 2000-11,843 audits. These figures were provided by the IRS Public Affairs Office and other officials. The variations in the number of audits in the 1990's reflected the allocation of resources between the determination and examination programs. When examination figures are lower it generally means that determination letter applications were given review priority. Note however the dramatic drop in examinations from 1998-2000 by almost 50%.

7/ This authority is now shared with the Director, EP Examinations, under the IRS Discrepancy Adjustment Program and, as a result, this problem no longer exists.

8/ Exclusive CCH/IRS interview, CCH Pension Plan Guide Special Report #843, April 17, 1991.

9/ David Mustone is a partner with Hunton & Williams in McLean, VA.

10/ 92 TC 641 (1989).

11/ 92 TC 1173 (1989).

12/ Bill Hulteng is now on the staff of the Pension Benefit Guaranty Corporation.

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