PERMANENT PENALTY RELIEF FOR DELINQUENT SOLO 401K RETURNS

by Mat Sorensen | Aug 18, 2015 | Uncategorized

Do you have a solo 401(k)? Have you been filing form 5500-EZ each year for the 401(k)? Are you aware that there is a penalty up to $15,000 per year for failure to file? While many solo 401(k)s are exempt from the 5500-EZ filing requirement, we have ran across many solo 401(k) owners who should have filed and who have failed to do so. If you you have a solo 401(k) and have no idea what I’m talking about, stay calm, but read on.

ANNUAL 5500-EZ FILING FOR SOLO 401Ks

One of the benefits of a solo 401(k) is the ease of administration and control because you can be the 401k trustee and administrator. However, as the 401(k) administrator and trustee it is your own responsibility to make the appropriate tax filings. This would include filing any required tax returns  for the 401(k).  In general, there is no tax return to file for a self-directed solo 401(k) with total assets below $250,000.  However, once the plan assets exceed $250,000 at the end of a plan year, a tax return filing is required.  The return the 401(k) files is called a 5500-EZ.  Recently, more and more solo 401(k) owners have contacted us because they set up their solo 401(k) online or with some other company and they were never made aware that they are supposed to file a 5500-EZ when their plan assets exceed $250,000.  Some of these individuals have multiple years in which they should have filed the 5500-EZ but failed to do so.  The penalties for failing to file a 5500-EZ when it is required can be quite severe, with fees and penalties as high as $15,000 for each late return, plus interest.

TEMPORARY PENALTY RELIEF PROGRAM EXPIRED

The IRS conducted a temporary program and allowed penalty relief from June 2, 2014 to June 2, 2015. We used this temporary penalty relief program to avoid tens of thousands of dollars of penalties from the IRS for clients who had failed to properly file annual 5500-EZ returns for their solo 401(k). The IRS has indicated that over 10,000 delinquent returns were filed under the temporary program which ended on June 2, 2015.

PERMANENT PENALTY RELIEF PROGRAM

The IRS recently announced a new 5500-EZ penalty relief program for delinquent returns from solo 401(s)s (aka, one-participant plans). This new relief program is known as Rev. Proc. 2015-32 and is similar to the temporary program except that a submission fee is now due. The procedure and criteria of the new program are as follows.

1. In order to qualify for this program, your solo 401(k) plan must not have received a CP 283 Notice for any past due 5500-EZ filings, and the only participants of your solo 401(k) plan can be you and your spouse, and your business partner(s) and their spouse.  This program is available to all solo 401(k) plans, regardless of whether it is a self-directed plan. I will note that we have successfully used the temporary program which had this same requirement for a client who did have a IRS collection notice (CP 283 Notice) so don’t count yourself out if you have received a notice.
2. File all delinquent returns using the IRS form in the year the filing was due.
3. Write in red letters at the top of the first page of each filing, “Delinquent return submitted under Rev. Proc. 2015-32, Eligible for Penalty Relief”.
4. Attach IRS form 14704.
5. Mail all documents to the IRS, Ogden, UT office.
6. Pay a $500 fee per delinquent return being filed up to a maximum total fee of $1,500 (e.g. three years of delinquent returns). You can file more than three years of delinquent returns but the total fee will not exceed $1,500. While this fee seems high, we have seen $15,000 penalties per year against solo 401(k) plans who have failed to file so it is a deal in contrast to the penalty.

In sum, if you have a solo 401(k) plan that should have filed a 5500-EZ for years past because the plan assets exceeded $250,000 at the end of the plan year, then you should take advantage of this program. This relief program can literally save you thousands of dollars in penalties and fees.  If you have any questions about this program or would like assistance with submitting your late 5500-EZ filings under this program, please contact the law firm as we are assisting clients with current and past due 5500-EZ filings for their solo 401(K)s.

By: Mat Sorensen, Attorney & Author of The Self Directed IRA Handbook

What Every Lawyer and Advisor Needs to Know About Self Directed IRAs

by Mat Sorensen | Aug 17, 2015 | Uncategorized

Wealth Counsel Presentation: Last week I gave a presentation and continuing legal education class, What Every Lawyer and Advisor Needs to Know About Self Directed IRAs, to the Arizona Forum of Wealth Counsel. This was a mighty fine group of lawyers and they even bought all of the books I brought. Thanks guys. Here’s a copy of the slides from the presentation to anyone who is interested. WHAT EVERY LAWYER AND ADVISOR NEEDS TO KNOW ABOUT SDIRAs Wealth Counsel …

Have You Amended Your Solo 401k Plan Lately?

by Mat Sorensen | Aug 11, 2015 | Uncategorized

Have you amended your solo 401(k) plan lately or are you planning on paying penalties? IRS Rev Proc. 2007-44 requires that every 401(k) plan, including solo 401(s)s,  be updated and amended at least every six years.

PLANS MUST BE UPDATED EVERY 6 YEARS

This six year cycle doesn’t begin on the date you established your solo 401(k) but instead on the date that the plan document you are using was approved or last amended. So, for example, if you established a solo 401(k) in 2010 and if you used a plan last updated or amended in 2008 then your plan amendment due date has passed and your plan is now out of compliance and will be subject to penalties.

LARGE PENALTIES FOR NON-COMPLIANCE

Unfortunately, we are running across more and more self directed clients who have self directed solo 401(k) plan documents that have not been amended and kept up to date properly and as a result their plan isn’t in compliance with the law. The penalties for non-compliance are steep and increase the longer your plan is out of date. We’ve seen fines in the tens of thousands of dollars for plans out of compliance for over a couple of years. Don’t forget your obligation to keep the solo 401(k) plan updated.

CORRECTION PROGRAMS

The IRS does have a Voluntary Corrective Program that can be used to fix plan mistakes such as plan update failure but you must avail yourself of these options before the IRS issues penalties and fines. There are still typically fees for using the plan correction program but they are insignificant when compared to the penalties that can be assessed for failing to update your plan or to keep it up to date. While self directed solo 401(k) plans established with self directed IRA custodians have generally been kept in compliance, the plans we find that are typically out of compliance are those set up by third party companies who simply sell you documents on-line and leave you to figure everything else out. And, unfortunately, this is one of those things that isn’t being figured out.

Talk to your professional plan administrator, if you have one, or contact us at the law firm to determine if your plan is in compliance with the plan amendment requirements.

By: Mat Sorensen, Attorney and Author of The Self Directed IRA Handbook

Swimming in Liability: Demi Moore, Pools, and Landlord Tips

by Mat Sorensen | Aug 4, 2015 | Uncategorized

Actress Demi Moore recently discovered a dead man in her pool. This unfortunate situation caught the media’s attention and caused many to think of pool safety and liability issues.

As a lawyer with many clients who own rentals in Arizona, Florida, and California and other states where pools are common, I thought it would be helpful to address the issues of pool liability and safety.

LIABILITY

First, let’s discuss liability as it relates to pools. Generally, the property owner is responsible for maintaining the pool in a safe and reasonable manner. In the case of Demi Moore, what occurred was that her assistant held a party at the house while Demi was away and a man drowned in the pool at this party. Because Demi’s assistant is an employee that means that Demi is also responsible for her employee’s actions. So her assistant’s failure to keep the pool safe during the party becomes a liability issue for Demi. Also, as the pool and property owner, Demi is responsible to maintain care at the home and around the pool.

There are two ways a property owner can be liable for accidents that occur at a pool. First, if you violate a local law (city or state) that relates to pool safety you can be held strictly liable. In most instances, there are laws that govern what safety precautions should be present on a home. These requirements vary by state but include a combination of safety barriers (e.g. fences), pool covers, and door exit alarms. If your property and pool do not comply with these requirements and if an accident occurs at your properties pool, you can be held “strictly” liable for the accident that occurs on the property. Consequently, make sure you understand the rules in your city and state so that you are complying with the safety laws. Not only will this help prevent unfortunate accidents but it will also make you less liable in the event of an accident.

The second way you can be liable for a pool accident, is if the property and pool is otherwise unsafe. This could occur if safety precautions aren’t working (e.g. broken fence) or if the pool is otherwise unsafe or is left unsupervised while children or other persons who may need supervision are around. In many instances, if the landlord is aware of a dangerous pool condition and doesn’t fix it then they are liable for any accidents. In the case of Demi Moore, the argument may likely be that the pool was un-safe because it was not properly supervised while there was a party where alcohol was served (I’m assuming that occurred). While I haven’t seen these facts alleged, this is a common issue and safety problem and if alcohol is being served around a pool you better make sure the pool is properly being supervised. Appoint a designated non-drinking lifeguard.

As a landlord, you have a duty to your tenants to ensure that the pool includes the necessary safety features required by law. You can also be liable for damages and accidents to their guests to the property. And sometimes, even trespassers can hold you liable for damages incurred from the pool while trespassing (usually this would only apply to children who were able to access the pool).

HOW TO PREVENT LIABILITY AND PROTECT ASSETS

Here’s a quick summary of things to do that will limit your liability from pool accidents.

1. Comply with all safety requirements for your city/state (e.g. fences, exit alarms, etc.)
2. Include a clause or separate pool disclosure and waiver. This document will include the following.
   1. The tenants use the property at their own risk.
   2. Have the tenant specify if all of the occupants of the property can swim. If any occupant cannot swim (e.g. young children), then additional caution should be taken and indicate in the waiver that the pool must be supervised at all times the child is at home. This may also be a good reason not to rent to someone as your liability does increase.
   3. State that the tenant is responsible for maintenance of the pool safety equipment (e.g. fences, exit alarms, as applicable) and that the tenant must immediately notify the landlord of any safety feature or pool equipment repairs that are needed.
   4. State that the Tenant agrees to supervise the pool at all times that guests are at the property.
3. Make sure that your property/landlord insurance (rental dwelling landlord policy) includes protection for the swimming pool and that your agent knows there is a swimming pool on the property. The presence of a pool will increase your insurance premium slightly. I have a rental with a swimming pool personally and it increased my premium slightly over a similar rental I have without a pool but it isn’t significant. The pool is listed on my policy and accidents are covered under my Landlord/Business liability policy provisions. One thing to keep in mind is that your insurance company could deny coverage if you do not have the adequate pool safety features on the property required by law. So, again, make sure you know the local pool safety laws and requirements for pools in your state and city.
4. Own your property with an LLC so that if something occurs on the property your LLC is liable for any damages as opposed to exposing all of your personal assets. In general, when the LLC owns the property the LLC is liable for anything that occurs on the property and a plaintiff tenant cannot reach your personal assets held outside the LLC.

Hopefully none of us have to deal with a tragic pool accident. I hope this article helps landlords and real estate investors understand their responsibility and precautions that should be taken when a pool is located on one of your rentals. Pools can add great value to a home and are a nice feature for the “move-up” rental market but they need some extra attention and care from property owners.