The Internal Revenue Service is now launching questionnaire projects to gather information about retirement plans, in addition to conducting random, full scope audits. What should you do if a questionnaire is received? First - do not ignore it and, second, ask your advisor to help with the responses. A proactive review of your retirement plans’ operations is never a bad idea. 

The Internal Revenue Service is the federal government agency that, along with the US Department of Labor, oversees an employer’s operation tax qualified and non-qualified retirement and deferred compensation plans. Many of our clients have received the often-dreaded audit notice, complete with a five page request for documents pertaining to the employer’s retirement plan and payroll records. After utilizing substantial internal and outside professional resources to prepare for the “full scope” audit and respond to the document request, an IRS “specialist” graces you with his or her company for however many days it takes to complete the review, followed by a wait of an indeterminate period of time, until you (hopefully) receive the letter advising that all is well with your retirement plan.

However, the IRS is now utilizing short questionnaires to identify those employers whose retirement plans may warrant review, in addition to conducting random audits. These questionnaires were first mailed to 1,200 401(k) plan sponsors in May of 2010. The questionnaires requested information regarding the Plan’s demographics, plan participation, employer and employee contributions, application of “top heavy” and “discrimination” testing, participation in voluntary compliance programs and plan administration. Generally, a 15 day deadline for a response is imposed on the recipient. 

The IRS issued a report in April of 2013 on the statistics gathered following a review of the questionnaire responses. Although the report did not address the number of full scope audits triggered by the questionnaire responses and lack of responses, IRS representatives made clear that an employer’s outright failure to respond to the questionnaire did result in a full scope audit. 

The IRS recently announced that it was launching another questionnaire project, this one aimed at deferred compensation plans sponsored by tax-exempt organizations. Recipients of the questionnaires are being identified from a review of Forms W-2 filed by employers in 2011 with Code “G” in box 12, indicating sponsorship of a deferred compensation plan for a tax exempt organization. The questionnaires seek to identify certain impermissible provisions in these plans. Therefore, careful attention should be paid to the responses. 

A likely subject of the next questionnaire project will be tax deferred annuity programs (“403(b) plans”) sponsored by tax exempt organizations. 

Takeaway for employers: If you receive a questionnaire from the IRS, do not ignore it. Responses should be reviewed by counsel or a retirement plan professional to ensure that the questions are being answered accurately and, if the questionnaire responses trigger issues, that proactive, corrective action can be taken. There is no time like the present, before you get a questionnaire, to conduct a check of plan operations to confirm that the operations conform to both the terms of your retirement plan and the requirements of the Internal Revenue Code and ERISA.