On June 3, 2022, the Internal Revenue Service (“IRS”) announced a new pre-examination compliance pilot program beginning in June 2022. Under the pilot program, the IRS will notify a plan sponsor by letter that his retirement plan has been selected. for review and will allow the plan sponsor 90 days to review their pension plan documents and plan transactions and to correct any problems that may be discovered. This article provides background information and describes the pilot program in more detail.
IRS Pension Plan Audits
The IRS conducts hundreds of qualified pension plan audits each year. Several factors can trigger an audit, including (i) information on a pension plan’s annual report (Form 5500), (ii) member complaints, (iii) referrals from other agencies such as the Department Labor or Pension Benefit Guaranty Corporation, (iv) Determination Letter Requests, and (v) Random Selection by the IRS.
The IRS typically begins the audit process with an initial audit letter (letter 6031) notifying the plan sponsor of the review and requesting pension plan documents and other information. An overview of the IRS pension plan review process can be found here. Once the IRS begins an audit, it may extend its review to prior or subsequent plan years or related statements or issues. If an IRS audit reveals a plan qualification error, the error can be corrected in one of two ways under the IRS Employee Plan Compliance Resolution Program (“EPCRS”). ), which is stated in Revenue Procedure 2021-30. First, if the qualification error is insignificant, the IRS agent may authorize the plan sponsor to self-correct the error under the EPCRS (“SCP”) Self-Correction Pogrom without paying penalties. Second, if the IRS officer determines that the error is material, the plan sponsor must correct the error under the EPCRS Audit Closure Agreement (“Audit CAP”) program, pay penalties to the IRS, enter into an IRS closure agreement, and possibly adopt new procedures to prevent future qualifying errors.
New IRS Screening Compliance Pilot Program
The IRS review process is time-consuming and costly for both the IRS and plan sponsors, and the new pilot screening program aims to promote compliance while reducing audit costs. Although the IRS announcement is not specific, it appears that the pilot program will apply to IRS reviews of 401(a) and 403(b) retirement plans. The IRS announcement does not indicate whether all or only certain pension plans selected for audit will be offered the pre-examination pilot program.
The good news is that plan sponsors offered the pilot program have 90 days to review their plan documents and plan operations for any qualification errors, and may be able to correct any errors themselves. errors using the SCP correction procedures and avoid a full audit. The plan sponsor must submit a description of the errors and documentation of the correction to the IRS. The IRS will review the documentation and determine whether it agrees that the qualification errors were corrected and were eligible for self-correction under the SCP. If he agrees, the IRS will issue a closure letter. If the sponsor discovers qualification errors that cannot be corrected under the SCP, they can correct them through Audit CAP and request a closeout agreement with the IRS. The IRS will use the established EPCRS Voluntary Correction Program fee structure here (which should be less than the fees assessed under the CAP audit) to determine the amount of the penalty under the closing agreement. Under the pilot program, the IRS can still conduct a limited scope or full review, whether or not corrections have been made. If the plan sponsor does not respond to the IRS within 90 days with proposed corrections under the SCP or audit CAP, the IRS will schedule a review of the pension plan.
At the end of the pilot program – the announcement does not specify the end of the pilot program – the IRS will evaluate the effectiveness of the program in reducing the time spent on pension plan reviews and determine whether the program should be part of the strategy ongoing IRS compliance.
Actions for plan sponsors
Plan sponsors should be proactive instead of waiting for a letter from the IRS. They must ensure that their plan documents are up to date with applicable tax laws. In addition, they should review their pension plan procedures to ensure that they are consistent with their plan documents and are being followed. If errors are discovered, plan sponsors should use self-correction procedures under the SCP, if eligible, or voluntary correction procedures under the EPCRS instead of waiting for an audit of the IRS. Ninety days is not a significant period for finding and correcting errors, particularly if board (or committee) approval is required for a change in plan or method of correction.