IRS has announced that it will be sending, at the end of this month, a seemingly innocuous compliance questionnaire to twelve hundred 401(k) plan sponsors who filed 2007 Forms 5500. While the questionnaire seems on its face to be a survey of plan practices, the wrong answers to the questions or simply failing to respond to the questionnaire could result in a real plan audit.

If you are on the receiving end of one of these questionnaires, suppress the urge to toss it or rush through it, and make every effort to answer the questions carefully and accurately. IRS recently announced that it will be auditing some colleges and universities that sent in questionnaires under a prior compliance program, presumably because of their answers. This gives a further indication of where the new program is heading, but these audits won’t happen immediately.

Questions asking about total employees and excluded employees, and asking for total elective deferrals for highly compensated and non-highly compensated employees will enable the IRS to review compliance with non-discrimination requirements. If you are aware of compliance problems, you may have an opportunity to self-correct or make a correction filing under the IRS’ voluntary correction program before you are in the audit cross-hairs. This program may involve significantly reduced fees, penalties and/or compliance costs than you would incur if an IRS auditor uncovered the plan problem.

Here are a few tips for handling the questionnaires:

  • Make sure everyone with knowledge of the plan signs off on the answers.
  • Consult IRS instructions or your professional advisers if you are unsure how to respond to specific questions.
  • Make sure to complete the form on-line using your assigned PIN. Do not mail paper copies.