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On June 3, 2022, the Internal Revenue Service (“IRS”)
announcement a pilot audit program and has already issued notices to pension plan sponsors. This pilot program notifies pension plan sponsors that they have been selected for an audit and gives them 90 days to prepare and correct plan errors themselves. A plan sponsor who acts quickly upon receipt of the letter may be able to narrow the scope of the audit, reduce or eliminate potential fines by correcting any issues themselves before the audit begins, or even avoid the audit altogether.
The IRS announcement was very short and we hope more details will be provided. Although the details of the program are unclear, the IRS said its goal with this pilot program is to reduce the burden on taxpayers and the time the IRS spends on reviews. This Customer Alert summarizes what is currently known about the program and what to do if you receive a letter from the IRS.
The IRS will notify plan sponsors if any of their retirement plans have been selected for an audit. The letter will list one or more areas of interest for the IRS during the audit. The plan sponsor will have 90 days from the date of the letter to review the plan documents and transactions and identify any errors. If the plan sponsor does not respond to the letter, the IRS will contact the plan sponsor to schedule the audit.
The editing process
If errors are discovered in the documents or transactions of the plan during this 90 day window, the plan sponsor may be authorized to correct these errors itself. These corrections can be made in two ways:
- If the error qualifies for self-correction under the IRS’ Employee Plan Compliance Resolution System (“EPCRS”), a plan sponsor may remedy the error in accordance with the principles of EPCRS self-correction, as described in Rev. proc. 2021-30. All voluntary self-corrections will be submitted to the IRS to determine if they are appropriate.
- Violations not eligible for self-correction can still be corrected using the EPCRS. To do this, the plan sponsor can request a termination agreement from the IRS, which will then assess a penalty. The IRS will use the Voluntary Correction Program (“VCP”) fee structure to determine the amount of the penalty. VCP fees are generally much lower and more predictable than the Audit Closure Agreement Program (“Audit CAP”) fees that would normally apply.
Once a plan sponsor has completed its review, information detailing the audit process and corrections must be provided to the IRS for review. If the IRS agrees with the plan sponsor’s findings and corrections, and the documentation shows no additional compliance errors, the IRS will apparently issue a closure letter. If the IRS disagrees or suspects there are additional errors, it may perform a limited or full audit of the plan. If the plan sponsor does not respond and provide documentation, an audit will be scheduled.
Benefits of this program
It is unclear how long the IRS will pilot this program. The program offers two clear advantages to plan sponsors who choose to complete a self-assessment during the 90-day period. The first is that the program potentially allows plan sponsors to avoid an IRS audit entirely. Even though auditing cannot be completely avoided, the second benefit of the program is that voluntary remediation using the VCP fee structure should result in much lower penalties.
What to do
If you receive a letter from the IRS, you should contact a member of the Kutak Rock Benefits Practice Group immediately. The 90-day clock begins to tick from the date of the letter, and success under the program depends on prompt action to identify and correct errors in accordance with IRS guidelines. Our experienced attorneys can help you review your plan, correct any errors found, document the self-audit and corrections, and draft a response to the IRS.
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.
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