3992 / What are the penalties for engaging in a prohibited transaction?
A first tier tax equal to 15 percent of the amount involved is imposed on each prohibited transaction for each year or part thereof from the time the transaction occurs until the earliest of the date: (1) it is corrected, (2) a deficiency notice is mailed, or (3) the tax is assessed.1 An employer fined under this provision for failing to make timely 401(k) transfer deferrals was assessed the 15 percent penalty only on the amount of interest the employer would have paid for a bank loan for the same amount, not 15 percent of the amount of the late deposit.2
All disqualified persons who participate in the prohibited transaction, other than a fiduciary acting only as a fiduciary, are jointly and severally liable for the full amount of the tax. A trustee was held liable for the tax even though the trustee did not vote to approve the payment that was determined to be a prohibited transaction; the Seventh Circuit Court of Appeals determined that the trustee had benefited from the payments and thus had participated in the transaction.3
An act of self-dealing involving the use of money or property (for example, the leasing of property) may be treated as giving rise to multiple transactions – one on the day the transaction occurs and separate ones on the first day of each taxable year within the above period – and, thus, may result in multiple penalties.4
Second Tier Tax