Synopsis: On June 3, 2022, the IRS announced the launch of a “pre-examination” compliance program. Under the new program, the IRS sends letters to plan sponsors about an upcoming examination of their retirement plan or plans. The letter gives the plan sponsor 90 days to voluntarily review its retirement plan(s) for plan document and operational compliance, and self-report any errors and/or corresponding corrections back to the IRS no later than the end of the 90 day period. Following the IRS’s review of the plan sponsor’s response, the IRS can issue a closing letter or may choose to conduct a limited or full scope audit. Like all pilot programs, the IRS will evaluate the program’s effectiveness and determine whether it will be a permanent fixture of its compliance strategy. So is this new pre-examination compliance program a good thing or a bad thing for plan sponsors? Will the IRS use this to expand its audit abilities by having plan sponsors do its work for them, or will the program end up reducing the odds of a plan being subject to a full scope audit that could drag on for months or longer?
If you listen carefully, you may occasionally hear employee benefits practitioners applaud the IRS’ Employee Plans Compliance Resolution System (aka EPCRS), described in Revenue Procedure 2021-30, as being one of the most successful compliance programs in IRS history. This may be so. The program is designed to allow plan sponsors the opportunity to make reasonable corrections of retirement plan tax errors without penalty (and in many cases without even identifying the plan sponsor), other than the imposition of a user fee if a filing is made with the IRS. Moreover, since the form of its initial pilot program in the early 1990s, EPCRS has periodically and consistently evolved to further address difficulties facing plan sponsors intending to be compliant, but who are occasionally set-back by the complexities of the retirement plan regimes.
New IRS Pilot Program
The latest compliance-related enterprise is a new pilot program, announced last month, which concerns compliance errors discovered upon IRS examinations of retirement plans (i.e., plan audits). When such errors are discovered by the IRS upon audit, EPCRS is often no longer available and the consequences can be particularly costly. Inevitably, it would be significantly less expensive for a plan sponsor who self-identifies errors and utilizes EPCRS before being notified of the examination. But that doesn’t always happen.
The essence of the new pilot program is to give plan sponsors a “90-day warning” to self-identify and report any errors that would have been precluded from EPCRS, had the errors been identified by the IRS on exam.
If a plan sponsor fails to respond within the 90-day window, the IRS will schedule an exam.
Errors that the plan sponsor identifies, may be either self-corrected if otherwise eligible under EPCRS. If not eligible for self-correction under EPCRS, the plan sponsor can enter into a closing agreement with the IRS to make the appropriate corrections at the cost of the voluntary compliance program (aka VCP) fee–which is likely to be a small fraction of the cost that would be facing the plan sponsor if the error(s) were discovered by the IRS upon examination.
After reviewing the plan sponsor’s response, the IRS may just enter into a closing agreement bringing the matter to an end, but reserves the right to conduct a limited or full scope exam, presumably if the response is not up to snuff.
We’re told from our industry sources that the IRS has unofficially stated that the pilot program presently is limited only to 100 defined contribution plans that have been identified for potential errors relating to compliance with the requirements of Internal Revenue Code section 415 (the annual contribution limit applicable to tax-favored retirement plans). If the pilot program is successful, the IRS intends to apply it more broadly.
Benefits Counsel’s Perspective
Through a non-cynical lens, an expanded version of this program can be a win-win for plan sponsors and the IRS. Plan sponsors get a valuable heads up that an exam is coming and a “second chance” to correct errors. On the other hand, the IRS presumably can more efficiently allocate its resources.
Naturally, if you receive one of these letters, our advice is to conduct a robust review of the issues identified in the letter and prepare an appropriate response with the help of your Seyfarth Shaw employee benefits counsel.
We encourage you to contact us immediately if you receive one of these notices from the IRS.