The Internal Revenue Service has provided selected qualified retirement plans a chance to inspect and potentially self-correct any compliance issues through a new 90-day pre-examination pilot program announced in the June 3 Employee Plans newsletter. The agency says the pilot program’s goal is to reduce taxpayer burden by lowering the number of full-scope examinations.
IRS pre-examination program
The program gives plan sponsors 90 days to review the plan’s document and operations to determine whether they comply with current tax law requirements. The IRS reportedly will inform the letter recipient about specific issues to focus on and may offer reduced fines for completing the request. Plan sponsors who don’t respond to the IRS query within the 90-day period will trigger an automatic examination by the agency.
What to do if your plan is selected
Plan sponsors who receive a letter should read it carefully as soon as possible. The IRS is keenly focused on compliance with plan documents; thus, plan sponsors should notify any service providers that may help gather information and run tests, such as auditors, plan counselors, third-party administrators and trustees/custodians.
Plan sponsors should treat this request just like a regular examination. It is not unusual for plan sponsors to outsource many of the plan’s functions, and the sponsor may have questions about whether the plan is in compliance. Therefore, contacting service providers as soon as possible can be very helpful to find the right documents and run the proper tests.
Remedies for errors
If plan sponsors discover errors, the IRS recommends reviewing the Employee Plans Compliance Resolution System (ECPRS) under Revenue Procedure 2021-30 to determine if any errors may be self-corrected. In short, the EPCRS program consists of three tiers of correction: the Self-Correction Program (SCP), the Voluntary Correction Program (VCP) and the Audit Closing Agreement Program (CAP). The SCP and the VCP are user-initiated programs, whereas the Audit CAP applies to plans undergoing an examination initiated by the IRS.
If they cannot correct errors through the SCP, plan sponsors can report problems voluntarily to the IRS and request a closing agreement. In exchange for the information, the IRS will only impose fines based on the VCP fee structure, which caps out at $3,500. This can represent significant savings to plan sponsors, who might otherwise be subject to the Audit CAP penalties.
It is important to note that once the IRS initiates an examination, plan sponsors can no longer use the self-correction or voluntary programs.
Plan sponsors should document their process — explain the errors and show the steps used to correct any issues. Additional documentation that helps clarify what happened may provide valuable context for the IRS in understanding the situation. If the agency disagrees with your findings, the IRS may conduct a limited or full-scope examination.
The IRS had not issued further information on the pre-examination program as of this publication date. Notifications have already gone out, so if you have not received one, there is a strong possibility that you won’t receive one. The agency has not provided any information about how many notices were sent, who or what types and sizes of plans received them or whether the program will continue throughout the year.
Insight: Pay careful attention to notices
These days, it is easy to overlook what gets delivered through “snail mail,” but that is exactly how the IRS distributes its notices. It is critical to carefully monitor your plan’s mail to ensure you are aware of any notices you may receive.
While 90 days may seem like plenty of time to respond, the deadline is approaching soon. Plan sponsors with pre-approved plans are already working on restating their plan documents, and others are working on end-of-year amendments to comply with recent legislative changes. Plan sponsors who have questions on the steps they should take regarding this 90-day pre-examination pilot program should reach out to their advisor as soon as possible.