I get it. Most people don’t understand late filing penalties associated with Form 5500 (including 5500-EZ and 5500-SF). Many are not aware of reasonable cause for late filing form 5500.
Why would they?
But once you file late (or don’t file at all), you will find out how painful the penalties can be. They can actually be as high as $150,000 for each form!
Take a look below at what the IRS has to say on their site…
While the penalties are steep, you can often get relief or an abatement as long as you have reasonable cause. You just need a few tips and tricks.
In this post, we will give you a few strategies to get those penalties relieved or abated. Let’s dive in.
- What is Form 5500?
- Form 5500 Penalties
- Form 5500 Late Filing Penalty Relief
- Penalty Abatement for Late Filing of Form 5500
- Reasonable Cause for Late Filing of Form 5500
- Additional Information Required by IRS
- Final Thoughts
What is Form 5500?
Form 5500 (including 5500EZ and 5500SF) is filed for certain retirement and pension plans. They disclose certain financial information, like plan contributions and employee participation.
The company must generally file Form 5500 by the end of the 7th month after their plan year ends. This is July 31st for calendar year plans. But you can file an extension until October 15th.
Companies usually use third-party administrators (or TPAs) to prepare and file their Form 5500. As a result, most companies never take it seriously if their company’s Form 5500 is prepared and filed accurately and on time.
The moment they receive a letter from the IRS or DOL stating that they have not timely filed is when they realize the mistake. Now the stress starts to build once they realize the substantial penalties they are facing.
Form 5500 Penalties
Under the SECURE Act, penalties have increased substantially. Effective for returns that are required to be filed after December 31, 2019, the SECURE Act increased the penalty to $250 per day, not to exceed $150,000 for a late-filed form.
But the penalties don’t stop there. In addition to the IRS penalty, the DOL can assess a civil penalty against a plan sponsor in an amount not to exceed $1,100 per day as a result of failure to timely file Form 5500.
Plan administrators may also face other penalties on incomplete filings unless they submit a statement of reasonable cause for failing to file a complete annual report and the DOL approves it.
Form 5500 Late Filing Penalty Relief
Plan administrators can file Form 5500 electronically with the DOL’s Employee Benefits Security Administration (EBSA) and attach a letter stating reason or cause for late submission. If the DOL and IRS find the cause to be reasonable, plan administrators will be forgiven of the late penalties.
If the cause does not convince DOL and IRS, a proposed penalty notice will then be sent to the plan administrators. The plan can contest the penalty assessed.
|Reasonable Cause||Required Info|
|Family Death||Supporting Evidence|
|Inaccurate CPA Advice||Details of How Your Resolved Issue|
|Civil Disturbance||Timely Abatement|
|Destruction of Records Due to Disasters||Certify Under Perjury|
Another option is to participate in the DOL’s Delinquent Filer Voluntary Compliance (DFVC) program. The DFVC limits the potential penalties imposed by the DOL, but do not entirely eliminate the penalties.
To qualify, plan administrators electronically file a complete Form 5500 or Form 5500 – SF, and include all schedules and attachments for each delinquent year. They must check a box stating that they are filing under the DFVC program.
An online calculator is used to determine penalties payable and a check of the same amount is mailed or they can use an electronic payment method.
IRS may also waive late penalties assessed for filers who satisfies DOL’s Delinquent Filer Voluntary Compliance Program requirements, should also file any missing 8955-SSA forms, then satisfy the requirements for penalty relief and mail all required documents within 30 days after completing DFVC program filing.
Reasonable Cause for Late Filing of Form 5500
Aside from using the DFVC program, another option is to apply for a penalty abatement request. The IRS will review these requests on a case to case basis. You will need to have a “reasonable cause” if you are filing such a request.
Reasonable cause basically is a legitimate excuse for not filing on time. This means that you will basically need to convince the IRS that it was impossible for you to file the form due to unforeseen circumstances. Essentially, you did everything a reasonable person could have done to timely file.
Common Examples of Reasonable Cause
Some of the most common reasonable causes are listed below. I am not suggesting that these reasons will work every time and they are often not applicable. But at least they are something you can consider:
- Death of a close family member.
- Unavoidable absence due to events like hospitalization, jail or even rehab.
- Civil disturbance like riots etc.
- Destruction of records due to flood, fire, or some other event.
- Stuck in some other country. In the current pandemic situation this has been a case for many travelers who got held up in other countries due to cancellation of flights and closing of borders.
- Incorrect advice from a competent or trustworthy tax professional.
- Unable to file due to reasons beyond your control.
Even if one of the items noted above is applicable, the IRS wants you to take responsibility for the late filing. You must be sincere and acknowledge that you understand that penalties are necessary under the law and that you understand it is your responsibility to timely file. You simply can’t “blame” someone else. Reasonable cause for late filing form 5500 may take some time.
Additional Information Required by IRS
The IRS may require some additional information or documentation from you to substantiate your claim of reasonable cause. Some of the facts that they can ask you for are:
- What happened and when did it happen?
- How were other financial matters handled during this time? By asking this question, the IRS basically wants to judge whether filing your form 5500 was the only thing that you ignored or were there other matters you ignored as well during this time.
- Were the circumstances out of your control?
- Do you have any evidence supporting your claims like third party documents such as hospitals bill, news clippings or even proof of natural disaster (or other events) that restricted you from being compliant.
- What corrective actions did you take once your issue was resolved?
Penalty Abatement for Late Filing of Form 5500
Plan administrators, including cash balance TPAs, need to make filing annual reports a critical task. They must be done until the plan is terminated and all funds are paid out.
|Form 5500-SF||Form 5500-EZ|
|Not for solo filers||One person plans|
|E-filing options||Two-page filing|
|For employees over 1,000 hours||Penalty abatement eligible|
|File on DOL site||Allowable for owner-only|
Failure to file will subject companies to significant penalties, which can be easily avoided. An internal department could be formed, or use an outside service provider to overlook the filing tasks accurately and on a timely basis.
How to abate Form 5500 late filing penalties:
- Verify filing status with your administrator. Your administrator (or TPA) is the one who will usually monitor compliance. If you have received a penalty letter, first send it to them to make sure that they research.
- Determine if reasonable cause exists. Reasonable cause can take many forms. Essentially, the IRS wants to know that you did everything a reasonable person would do to file timely.
- Review the Delinquent Filer Voluntary Compliance (DFVC) program. This might be the best option depending on whether you qualify and if you are a first-time offender. The forms can be a little daunting and you may need some assistance.
- Document your position. Make sure that you carefully review your position and document what transpired. The IRS wants you to take responsibility for your filing issue but may be sympathetic.
- File a timely response. Depending on your final resolution, make sure that you reply to the IRS on a timely basis. You don’t want to find yourself falling behind.
You should apply for the penalty abatement only if you feel that you qualify for any of the above-mentioned circumstances of ‘reasonable cause’. Another thing to note is that while writing your request, you need to speak about how your circumstances prevented you from filing. Emphasize on how the event was unforeseen and beyond your control.
You need to also let the IRS know that you had made efforts and taken reasonable steps to comply. Everything that you claim to the IRS should be backed by supporting evidence and documentation. If you can afford it, hire a legal professional to ensure that your penalty abatement request is drafted and structured correctly.