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5500 Preparer's Manual for 2012 Plan Years
The premier resource in the field of Form 5500 preparation, 5500 Preparer's Manual will help you handle the required annual Form 5500 filings for both pension benefits and welfare benefit plans.
The IRS properly withheld information requested by plan participants under the Freedom of Information Act (FOIA) about an employer's and a pension plan's participation in the IRS's Voluntary Compliance Review Program (VCRP) because the information requested was exempt from disclosure under Code Sec. 6103, according to the U.S. Court of Appeals in Denver (CA-10). The FOIA request on it face sought only third-party return information without the authorization of the third party as required under the FOIA rules.
Participants request VCRP submission documents under FOIA
Retired employees who were participants in a pension plan submitted an FOIA request to the IRS, seeking copies of all the documents associated with the IRS' handling of their former employer's submission under the VCRP concerning pension payments that resulted in an IRS Compliance Statement. The requested documents included the full submission made by the employer and the pension plan administrators --supporting documents, supplemental reports, discovery requests, orders, and all responses. The IRS responded that the participants' request sought "tax records" that were "confidential" and that the IRS must have the plan's written consent before it would "consider releasing the information requested." The participants received essentially the same answer when they appealed to the IRS' FOIA Appeals Office. That Office explained that the IRS is prohibited by Code Sec. 6103 from releasing the documents requested to a person other than the taxpayer --the plan --without its consent.
The participants filed suit in district court, seeking the IRS' disclosure of the requested information, or alternatively, an in camera court review of the information. The IRS filed a motion for summary judgment, contending the participants had not filed a perfected FOIA request and had not exhausted their administrative remedies because they had not provided the employer's and plan's authorization to release its return information. Thus, according to the IRS, the district court did not have jurisdiction to adjudicate the participants' FOIA claim.
The district court granted the IRS' motion for summary judgment and denied the participants' motion and request for an in camera review. The court found that because the information submitted under the VCRP could involve tax liability and was return information that the IRS could not release to the participants without the employer's and the plan's authorization.
The participants appealed. The appellate court concluded that the IRS properly withheld the requested information and affirmed the district court's judgment in favor of the IRS.
Disclosure of return information
FOIA provides the public "a right of access, enforceable in court, to federal agency records, subject to nine specific exemptions." One of the exemptions that is relevant to this case is for material that is specifically exempted from disclosure by statute. One such statute, Code Sec. 6103, generally prohibits the disclosure of "returns and return information." Code Sec. 6103, however, allows the IRS to disclose return information if the "taxpayer" or "person" whose return information is sought consents to the disclosure. Specifically, IRS regulations require that requesting parties must file a third-party's authorization with their FOIA request if they seek a third-party's return information.
The appellate court noted that the Code provides an "expansive" definition of "return information." The VCRP allows plan sponsors to voluntarily identify and correct operational failures of their plans with guidance from the IRS and permits plans to continue to provide participants with retirement benefits on a tax-favored basis. If the plan sponsor does not correct the plan as required in the compliance statement or if agreement cannot be reached that would result in a compliance statement, the plan could be subject to an audit. A failure to operate a plan properly can result in the employer's contributions becoming taxable, the disqualification of the plan, and the loss of the plan's tax-exempt status. In addition, in certain situations, the employer could be subject to an excise tax. The IRS argued that the information was return information because all of the information the employer and plan submitted to the IRS and received from the IRS under the VCRP pertained to the employer's deductions, possible tax liability, and the plan's qualification as a tax-exempt entity.
The appellate court stated that the IRS had provided a "specific and logical explanation as to why" Code Sec. 6103 and the relevant FOIA exemption exempted all of the requested information from disclosure. In addition, the court rejected all of the participants' arguments.
In camera review request denied
The appellate court affirmed the decision of the district court not to conduct an in camera review of the requested information. The court stated that the IRS had met its burden of explaining why the requested information falls within one of the FOIA's exemptions and Code Sec. 6103, and the participants had not provided a worthy argument that contradicted the IRS' position. The participants had also not asserted any colorable claim of bad faith on the part of the IRS. Thus, the district court did not abuse its discretion in refusing to hold an in camera review.
Request on its face seeks only third-party information
The court cautioned that the IRS's approach to this information request was only acceptable under FOIA because the IRS had shown that the participants' request on its face solely sought the employer's and the plan's return information. Because the participants' FOIA request sought only the employer's and the plan's return information and the participants had not submitted the employer's and the plan's consent with the initial request, the IRS had fulfilled its obligations under FOIA and IRS regulations and had properly withheld the requested information.
Source: Hull v. Internal Revenue Service (CA-10).
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