Filling in the Blanks: Avoiding IRS Scrutiny of Form 5500
The IRS has outlined some errors of omission — or commission — that could draw audit scrutiny for your plan sponsor clients.
Specifically, the IRS cautions that entering incorrect information — or in some cases leaving a field blank — on the Form 5500 increases the likelihood of being targeted for a compliance check.
The IRS cites the following examples of these types of errors:
- Sponsors incorrectly entered zero participants or left that line item blank.
- Filers incorrectly coded 403(b), 457 or non-qualified plan elective deferrals as 401(k) elective deferrals (box 12, code D) on their W-2, Wage and Tax Statement.
- Sponsors incorrectly marked their 5500 to show they adopted a resolution to terminate the plan when they hadn’t.
- Sponsors incorrectly marked their 5500 to show they distributed all plan assets but didn’t mark the return as the final return, or didn’t mark zero assets at the end of the plan year.
- Sponsors incorrectly marked their 5500 to show they terminated the plan when it wasn’t terminated.
- Sponsors incorrectly entered the fidelity bond amount on the next line, which asks if the plan had a loss caused by fraud or dishonesty.
- Filers incorrectly reported rollover contributions as SEP contributions on their Form 5498, IRA Contribution Information, in box 8 instead of box 2.
- Sponsors entered pension feature code 1, frozen defined benefit plan, on their 5500 return when their plan wasn’t a defined benefit plan or frozen.
It may be worth sharing with your plan sponsor clients that the IRS not only cautions that plan sponsors should “look at each line item and related instructions with fresh eyes,” but to be especially careful about just copying item entries from year to year without reviewing them carefully.