Under the IRS Employee Plans Compliance Resolution System (EPCRS), as set forth in Tax Procedure 2021-30, a plan that has been notified of an impending audit cannot resolve problems using the voluntary correction program, and the ability for self-correction is extremely limited. The only remaining option is to correct the issues under the Audit Closure Agreement Program (Audit CAP), which often requires the payment of costly penalties. On June 3, 2022, the IRS Office of Employee Plans announced a new program that gives plan sponsors who become aware of an upcoming audit the opportunity to disclose and remedy non-compliance with qualifications with the payment of significantly reduced penalties.
Starting this month, plan sponsors can be notified by letter that their pension plan has been selected for review. If a plan sponsor does not respond to the IRS within 90 days, the IRS will contact the plan sponsor to schedule a review of the plan. To minimize the risk of a full review taking place, plan sponsors should acknowledge receipt of the IRS notice and use the 90-day notice period to review their plan documentation and operations in order to identify any instances of non-compliance. Some common causes of plan non-compliance include:
- outdated plan documents that do not reflect recent changes to applicable laws and regulations
- administrative and operational practices that are inconsistent with plan documentation
- non-compliance with annual testing requirements, including Actual Deferral Percentage (ADP), Actual Contribution Percentage (ACP), Internal Revenue Code Section 415 (IRC) limitations, testing protocols most heavy, coverage and non-discrimination
- non-payment of required minimum distributions
- late or incomplete annual filings, including the timely submission of the annual Form 5500, audit report and required attachments.
If errors are discovered during the review, sponsors may self-correct under the EPCRS. If the plan sponsor identifies compliance issues that are not eligible for self-correction through the EPCRS, the plan sponsor may contact the IRS to request a termination agreement. If such a request is made during the 90-day notice period, the IRS will use the Voluntary Correction Program’s lower fee structure (with fees ranging from $1,500 to $3,500 depending on the amount of plan assets ) to determine the amount of the penalty instead of the highest. fees in the Audit CAP fee structure protocol.
Even if plan sponsors fix compliance issues themselves during the 90-day window, the IRS can still conduct a review. The IRS will consider the plan sponsor’s response, including any documentation and corrective material it receives, in deciding whether to pursue a full or limited review.
Failure to respond to the IRS notification within 90 days will result in a full review of the applicable pension plan.