Synopsis: On June 3, 2022, the IRS announced the launch of a “pre-examination” compliance program. Under the new program, the IRS sends letters to plan sponsors about an upcoming review of their pension plan(s). The letter gives the plan sponsor 90 days to voluntarily review its pension plan(s) for compliance with plan documents and operations, and report any corresponding errors and/or corrections to the IRS no later than later than the end of the 90 day period. Following the IRS’ review of the plan sponsor’s response, the IRS may issue a closure letter or may choose to conduct a limited or full scope audit. Like all pilot programs, the IRS will evaluate the effectiveness of the program and determine whether it will be an integral part of its compliance strategy. So is this new pre-exam compliance program good or bad for plan sponsors? Will the IRS use it to expand its audit capabilities by asking plan sponsors to do its job for them, or will the program end up reducing the chances of a plan being subject to a full audit that could take months or more?
If you listen closely, you may occasionally hear benefits practitioners applauding the IRS Employee Plans Compliance Resolution System (aka EPCRS), described in Tax Proceeding 2021-30, as the one of the most successful compliance programs in IRS history. It may be true. The program is designed to allow plan sponsors the opportunity to make reasonable corrections to pension plan tax errors without penalty (and in many cases without even identifying the plan sponsor), other than the imposition of an administration fee. use if a filing is made with the IRS. In addition, since the form of its initial pilot program in the early 1990s, the EPCRS has periodically and constantly evolved to further address the challenges faced by plan sponsors who intend to comply but who are sometimes frustrated by the complexity of pension plans.
New IRS pilot program
The latest compliance-related endeavor is a new pilot program, announced last month, that addresses compliance errors uncovered during IRS reviews of pension plans (aka plan audits). When such errors are discovered by the IRS during an audit, the EPCRS is often no longer available and the consequences can be particularly costly. Inevitably, it would cost a lot less for a plan sponsor to self-identify errors and use the EPCRS before being notified of the review. But that doesn’t always happen.
The essence of the new pilot program is to give plan sponsors a “90-day warning” to self-identify and report any errors that would have been excluded from the EPCRS, had the errors been identified by the IRS. during the exam.
If a plan sponsor does not respond within the 90-day period, the IRS will schedule a review.
Errors identified by the plan sponsor may be self-corrected if otherwise eligible under the EPCRS. If not eligible for self-correction under the EPCRS, the plan sponsor may enter into a termination agreement with the IRS to make the appropriate corrections at the price of the Voluntary Compliance Program Fee (aka VCP ) – which is likely a small fraction of the cost the plan sponsor would face if the error or errors were discovered by the IRS during the review.
After reviewing the plan sponsor’s response, the IRS may simply enter into a closure agreement ending the case, but reserves the right to conduct a limited or full review, presumably if the response is not to the height.
Industry sources tell us that the IRS has unofficially stated that the pilot program is currently limited to 100 defined contribution plans that have been identified for potential errors related to meeting the requirements of Section 415 of the Tax Code (the annual contribution limit applicable to tax-advantaged pension plans). If the pilot program is successful, the IRS intends to apply it more widely.
A Benefits Lawyer’s Perspective
Through a non-cynical lens, an expanded version of this program can be a win-win for plan sponsors and the IRS. Plan sponsors are warned that a review is coming and a “second chance” to correct errors. On the other hand, the IRS can presumably allocate its resources more efficiently.
Naturally, if you receive one of these letters, we advise you to thoroughly review the issues identified in the letter and prepare an appropriate response with the assistance of your Seyfarth Shaw Benefits Advisor.
We encourage you to contact us immediately if you receive any of these notices from the IRS.