By How would you like to owe the IRS a $150,000 penalty because you failed to file a simple two-page form? It can happen all too easily if you have a solo 401(k) or another self-employed retirement plan.
If you’re self-employed and you have a qualified retirement plan, such as a solo 401(k) for yourself (and your spouse, if applicable), Form 5500-EZ must be filed with the IRS once the assets in the plan exceed $250,000. The form is usually due July 31 each year.
You—the business owner—are the plan administrator or plan sponsor and the one responsible for filing Form 5500-EZ. You can use a third-party administrator to manage your plan, complete Form 5500-EZ, and even file it with the IRS, but you continue to have, in the absence of a rare contractual arrangement, the legal responsibility for a correctly and timely filed 5500-EZ.
Beware. If you fail to file Form 5500-EZ, the potential penalties are substantial: $250 per day, up to a maximum of $150,000 for each plan.
Fortunately, it’s easy to avoid the big penalties. The IRS has an amnesty program called the Late Filer Penalty Relief Program. All you have to do is simultaneously file all the Form 5500-EZs you failed to file and pay a fee. The fee is $500 for each delinquent return, up to a maximum of $1,500 per plan. $1,500 is not free, but it is likely much less than the non-filing penalty.
You won’t qualify for the amnesty program if the IRS has assessed a late filing penalty against you and issued a penalty notice. In this event, your only recourse is to attempt to get the IRS to remove the penalty for reasonable cause. If you’re successful, you won’t have to pay the IRS anything. Grounds for relief include natural disasters, inability to obtain records, serious illness or death, or other reasons showing your failure to file was not due to a lack of ordinary business care and prudence.
You can forgo the amnesty program and make a reasonable cause request if the IRS has not assessed the penalty. If you win reasonable cause relief, you won’t pay the IRS fee. But this is risky. If the IRS denies your reasonable cause request, you’ll no longer qualify for amnesty because the IRS will assess the penalty for the delinquent return(s).
If you want to discuss IRS Form 5500-EZ, please call me directly at 408-778-9651.