A disqualified person (e.g., the Trustee) who participated in a prohibited transaction with a Solo 401k plan can avoid the 100% tax by correcting the transaction as soon as possible. Correcting the transaction means undoing it as much as possible without putting the solo 401k plan in a worse financial position than if the Solo 401k Trustee had acted under the highest fiduciary standards.
If the prohibited transaction is not corrected during the taxable period, the disqualified person usually has an additional 90 days after the day the IRS mails a notice of deficiency for the 100% tax to correct the transaction. This correction period (the taxable period plus the 90 days) can be extended if either of the following occurs:
- The IRS grants reasonable time needed to correct the transaction; or
- the disqualified person petitions the Tax Court.
If the Solo 401k plan prohibited transaction is corrected within this period, the IRS will abate, credit, or refund the 100% tax.