IRS Launches 90-Day Pre-Audit Window to Correct Retirement Plan Errors

Voluntarily corrected errors have lower penalty costs for employers

Stephen Miller, CEBS By Stephen Miller, CEBS June 28, 2022
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IRS Launches 90-Day Pre-Audit Window to Correct Retirement Plan Errors

The IRS has launched a pilot compliance program that gives plan sponsors a 90-day window prior to an IRS audit of their tax-qualified retirement plan, such as a 401(k) or defined benefit pension, to fix any discovered errors. The program enables participating plans to pay either no penalty fee or a lower fee for voluntarily correcting any errors.

The IRS announced the program in its June 3 Employee Plans newsletter, accessible on the agency's Employee News webpage. The pilot program will notify plan sponsors by letter that their retirement plan was selected for an upcoming examination, the IRS said. The letter gives plan sponsors a 90-day window to review their plan's document and operations to determine if they meet current tax-law requirements.

If a plan sponsor does not respond within 90 days, the IRS will contact them to schedule an exam.

The announcement instructed plan sponsors to review and find mistakes in the plan's documents or operations, and to self-correct these mistakes using the IRS Voluntary Correction Program (VCP) under the Employee Plans Compliance Resolution System (EPCRS).

"If you find mistakes during your review that aren't eligible to be self-corrected, you can request a closing agreement," the IRS said. "We'll use the Voluntary Correction Program fee structure to determine the sanction amount you pay under a closing agreement. The IRS will review your documentation and determine if we agree with your conclusions and that you appropriately self-corrected any mistakes. We'll then issue a closing letter or conduct either a limited or full-scope examination."

The goal of the program is "to reduce taxpayer burden and reduce the amount of time spent on retirement plan examinations," the IRS explained. "At the end of this pilot, we'll evaluate its effectiveness and determine if it should continue to be part of our overall compliance strategy."

A 'Welcome Development'

The pilot program "is a welcome development for plan sponsors wishing to ensure their plans maintain their tax-qualified status," wrote Robert Wynne, an attorney in the Richmond, Va., office of McGuireWoods, and Alexia Faraguna, an attorney in the firm's Charlotte, N.C., office.

"Employers who are notified should quickly work with their plan advisers to determine whether any compliance issues exist and, if so, the appropriate corrective measures under EPCRS," they advised.

What to Expect

The Ferenczy Benefits Law Center in Atlanta reviewed a 90-day letter from the IRS that one of its clients already received and reported that the letter recommended sending the IRS certain items to "substantiate that your plan is qualified in form and to verify filings." These items included:

  • A signed copy of the plan document and all amendments relating to the years under examination.
  • Participant allocation schedules, census reports, account statements and Forms W-2 for the years under examination.
  • Administration documentation relating to the specific issue the IRS has identified (in this case, demonstrations that the plan has complied with the Internal Revenue Code Section 415 limits or, if not, that the error has been corrected).
  • Any other documents or explanations the plan sponsor believed would help the IRS in its review.

"The letter notes the plan sponsor may mail or fax these items, but it also advises that the sponsor can send electronic information in 'other ways' if it contacts the reviewer to discuss," the firm said.

If the plan sponsor does not respond during the 90-day period, "the IRS will simply go forward with the normal examination process," the Ferenczy attorneys said.

They added, "No one knows at this time how accommodating the IRS will be and how common it will be to have no, or a VCP-level, sanction in relation to the items that are discovered and disclosed during the 90-day period. However, one can only hope the IRS is going to the effort of rolling out this pilot program to have it work to reduce everyone's pain and time."


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