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The IRS Changes the Retirement Plan Audit Process

By July 7, 2022No Comments

In June, the IRS announced an unprecedented and innovative program to further enhance the likelihood that 401k Plans and similar Retirement Plans are complying with applicable tax law requirements.  Under the program, the IRS will notify an employer (i.e., plan sponsor) by letter that its Plan has been selected for IRS audit, and there is a 90-day period for the plan sponsor to review the plan documentation and plan operation to confirm that there has not been non-compliance because of errors, omissions, deficiencies, or the failure to follow the law and regulations.

The program provides the plan sponsor the opportunity to proactively address any non-compliance and take corrective action, before the IRS finds the problem on audit.  The IRS-approved self-correction program alternatives, which do not involve IRS penalty payments, can be used if applicable.  Corrective action that is not covered by the self-correction guidance can be taken, with a negotiated approval from the IRS for the action taken, and a penalty payment that is less than the IRS penalty that would apply if the problem was identified by the IRS (not the plan sponsor) on audit.

Full disclosure of the noncompliance and the corrective action must be provided to the IRS as part of the audit process.  After disclosure, the IRS may skip the formal audit and issue a closing letter, or may perform a limited or full scope audit.

If there is no response by the plan sponsor during the 90-day pre-audit review period, the IRS will schedule an audit.

Plan sponsors that receive an IRS letter need to react immediately, because the 90-day review period will run quickly and there may be a lot that needs to be done.  Please contact your ACSI Plan Administrator or Mark Brand if you receive such an IRS letter.

The IRS announcement follows.

“New 90-day Pre-Examination Compliance Pilot

The IRS Employee Plans function is piloting a pre-examination retirement plan compliance program beginning in June 2022. This program will notify a plan sponsor by letter that their retirement plan was selected for an upcoming examination.

The letter gives a plan sponsor a 90-day window to review their plan’s document and operations to determine if they meet current tax law requirements. If you don’t respond within 90 days, we’ll contact you to schedule an exam.

If your review reveals mistakes in the plan’s documents or operations, you may be able to self-correct these mistakes using the correction principles in our voluntary compliance program (EPCRS), described in Revenue Procedure 2021-30 (PDF).

If you find mistakes during your review that aren’t eligible to be self-corrected, you can request a closing agreement. We’ll use the Voluntary Correction Program fee structure to determine the sanction amount you pay under a closing agreement.

The IRS will review your documentation and determine if we agree with your conclusions and that you appropriately self-corrected any mistakes. We’ll then issue a closing letter or conduct either a limited or full scope examination.

Our goal with this program is to reduce taxpayer burden and reduce the amount of time spent on retirement plan examinations. At the end of this pilot, we’ll evaluate its effectiveness and determine if it should continue to be part of our overall compliance strategy.”

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