Demystifying Plan Audits – IRS Releases Updated Guidance

To clarify its plan audit process, the IRS recently updated the guidance it offers to plan sponsors. Even though the guidance is fairly general, it’s helpful for all plan administrators and sponsors to review. Let’s take a look at some common questions regarding plan audits.

Who gets audited?

The IRS chooses plans for audit in one of four ways:

  1. As part of a special IRS initiative focusing on a specific issue,
  2. On a tip-off,
  3. After discovering questionable or unusual items on a plan’s return, or
  4. By random selection.

The IRS says audits aren’t merely a game of “gotcha.” The purpose is to develop corrective strategies and help plan sponsors execute these strategies.

How can you prepare?

If you’re notified that the IRS wants to audit your plan, the examiner generally will give you a list of documents to review before the site visit. Similarly, after the on-site examination, the IRS may ask you to produce additional documents.

Remember: You don’t have to go it alone. As with a tax audit, it’s in your best interest to be represented by a plan expert. Make sure that you authorize this person to act on your behalf in writing, using the required IRS form (Form 2848, “Power of Attorney and Declaration of Representative”), and that he or she is licensed to practice before the IRS.

What does the IRS look for?

The IRS will likely examine one of 10 plan operational areas. Questions to ask about your plan include:

  1. Are all eligible employees properly participating?
  2. Is the plan properly crediting service and vesting in the plan?
  3. Do plan contributions, benefits, rights or features improperly favor highly compensated employees and thus discriminate against non-highly compensated employees?
  4. Have minimum contributions and benefits and accelerated vesting been provided to meet top-heavy requirements?
  5. Are all contributions and benefits within applicable limits?
  6. Are contributions correct and made timely, and are deductions within applicable limits?
  7. Has the plan correctly calculated, properly made, and timely and accurately reported distributions?
  8. Is the trust operating for the exclusive benefit of participants and according to fiduciary standards?
  9. Do the plan document and trust meet current tax law?
  10. Did the plan timely and accurately file federal returns and reports?

The IRS plan audit can cover any of these topics. Now is the time to review your plan to make sure it complies with the questions above.

If you receive a notice of an IRS plan audit, have the requested documents available on the examiner’s arrival. If you need additional time to gather the requested data, contact the IRS as soon as possible to request an extension of time.

At the conclusion of a plan examination, the examiner can instruct you to make operational changes to the plan, dictate a remedy to an alleged problem, or, in the worst-case scenario, disqualify your plan. Remember that you can appeal any IRS findings.


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