Note:

If you are not planning to close the NRU paper case file with the discrepancy adjustment case, call the Manager, EP Mandatory Review to discuss the case.

A SEP/SARSEP or SIMPLE IRA failure will normally result in two tax issues on Form 1040 discrepancy adjustments:

Addition to income of the amount of excess contribution in the current year (the amount allocated to the participant’s account in excess of the amount allowed as a "traditional IRA contribution." )

IRC 4973 excise tax on excess contributions for the current year and any excess contributions carried forward from prior years.

The 6% excise tax under IRC 4973 is imposed on the individual participants, and applies to all excess contributions to an IRA until the excess amounts (plus earnings) are either distributed to the individual or absorbed as traditional IRA contributions in later years.

An individual has until the due date of their Form 1040 (April 15 plus extensions) to distribute the excess to avoid the tax.

There is no requirement to remove excess monies, but any excess will be taxed accordingly until there is no longer an excess.

Individuals report IRC 4973 excise tax on Form 5329, which they may file along with Form 1040 or separately.

The filing of Form 5329 starts the running of the statute of limitations for purposes of IRC 4973 excise tax. This means that the Form 5329 has its own statute date that is not linked to the statute date of a Form 1040. If the individual never filed Form 5329, then the statute of limitations for IRC 4973 tax has not begun to run.

Even if the related Form 1040 statute of limitations is open and you/manager decide to pursue a discrepancy adjustment on the participant’s Form 1040, the individual should still address IRC 4973 excise tax on Form 5329.

If SB/SE or W&I has the related Form 1040 under examination, you may refer the IRC 4973 issue to SB/SE or W&I on Form 5666.

You may pursue IRC 4973 tax on Form 5329 even if we’re not adjusting income on Form 1040.