The U.S. Internal Revenue Service (IRS) is piloting a new retirement plan compliance program that gives plan sponsors the opportunity to correct plan defects 90 days prior to the commencement of an IRS audit. Here’s what you need to know.
- Notification for an Upcoming Examination: The IRS will notify a plan sponsor by letter if its plan was selected for examination.
- 90-Day Correction Window: The plan sponsor then has 90 days to review its plan documents and operations to determine if they meet current tax law requirements. Any mistakes may be self-corrected under the IRS’ Voluntary Compliance Program (VCP), which is a significant change from the IRS’ general rule that a plan is ineligible for VCP if it has received notice that the IRS intends to audit the plan. If mistakes cannot be self-corrected, the plan sponsor may request a closing agreement with fees determined under VCP rather than the substantially higher amounts that typically would be incurredunder the IRS’ Audit Closing Agreement Program.
- IRS Final Review: The IRS will review the plan sponsor’s conclusions and documentation to determine whether mistakes were appropriately self-corrected and, depending on its findings, will either issue a closing letter or conduct a limited or full-scope examination.
Actions plan sponsors should consider the following actions.
- Perform a compliance review. Conducting a detailed review to identify and correct plan errors identified by the IRS often takes longer than 90days because information needed to complete the review is held by third-party recordkeepers and administrators. Plan sponsors should consider performing periodic internal compliance reviews to confirm that all applicable requirements are being satisfied.
- Respond quickly. Plan sponsors who receive the 90-day IRS preaudit letter should respond quickly and determine as soon as possible what they need to submit to the IRS in response and whether any corrective action is needed. If a plan sponsor fails to respond within 90 days, the IRS will schedule the audit.
- Be proactive. Potential corrective actions will be significantly less expensive for a plan sponsor who self-identifies errors, so it’s important to correct errors as soon as they are discovered.