Fred's company has committed a prohibited transaction by lending money from the company's retirement plan. The tax consequences that will be imposed are:

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Any company committing a prohibited transaction faces a two-tiered tax consequence. 1) A penalty tax equal to 15 percent of the amount involved in the prohibited transaction is imposed on all disqualified persons involved (individually and together) for each year or part thereof that the transaction remains uncorrected. The 15 percent penalty carries over from year to year, and a new 15 percent penalty is assess each year, Because it is both a continuing transaction and a new transaction each year, this penalty tax pyramids. 2) An additional penalty tax equal to 100 percent of the amount involved is imposed if the prohibited transaction is not timely corrected.

Fred's Company Has Committed a Prohibited Transaction by Lending Money