Demystifying Plan Audits

IRS Releases Updated Guidance

The IRS recently updated the guidance it offers to plan sponsors in an attempt to clarify its plan audit process. Although the guidance is fairly general, it should be useful for all plan administrators and sponsors to review. Let’s examine some common questions regarding plan audits.

Who Gets Audited?

The IRS selects plans it will audit in one of the following four ways:

  1. In connection with a special IRS initiative focusing on a specific issue,
  2. Based on a tip-off it received,
  3. Discovery of questionable or unusual items on a plan’s Form 5500, or
  4. By random selection.

The IRS states that audits aren’t designed as a game of “gotcha.” The main purpose is to formulate corrective strategies and assist plan sponsors in executing these strategies.

How Can You Prepare?

If your plan administrator has been notified by the IRS that your plan has been selected to be audited, the examiner begins by submitting a list of documents they would like to review before the initial site visit. Following the on-site examination, the IRS may ask you to provide additional documents.

Keep in mind: you don’t have to go through the audit process alone. Much like a tax audit, it’s in your best interest to be represented by a plan expert. Be sure to authorize this individual to act on your behalf in writing, using IRS Form 2848, “Power of Attorney and Declaration of Representative,” and verify that he or she is licensed to practice before the IRS.

What Does the IRS Look For?

The IRS usually examines one of ten plan operational areas. Questions which plan sponsors should ask themselves about their plan in preparation for the audit include:

  1. Do all eligible employees properly participate in the plan?
  2. Is the plan properly giving its participants proper service and vesting credits?
  3. Do plan contributions, benefits, rights or features improperly favor highly compensated employees, and as a result, discriminate against non-highly compensated employees?
  4. In order to meet top-heavy requirements, have minimum contributions and benefits and accelerated vesting been provided?
  5. Are all contributions and benefits within allowable limits?
  6. Are contributions accurate and remitted on a timely basis, and are deductions within applicable limits?
  7. Have distributions been correctly calculated, properly made, and reported timely and accurately?
  8. Is the trust operating for the exclusive benefit of participants and according to fiduciary standards?
  9. Is the plan document and trust updated to be in accordance with current tax law?
  10. Were the plan’s federal returns and reports filed timely and accurately?

The IRS audit of your plan could address any of the issues listed above. It would be good practice to review your plan prior to an IRS audit to ensure it complies with these questions.

If you receive a notice of an IRS plan audit, have the requested documents available for the examiner upon their arrival. If additional time is necessary to gather the requested documents, contact the IRS as soon as possible to request an extension of time.

Prepare Now

At the conclusion of a plan audit, the examiner may do one of the following: instruct you to make operational changes to the plan, prescribe a remedy to an alleged issue, or, in the worst-case scenario, disqualify your plan. Any IRS findings can be appealed.