The Internal Revenue Service announced last week that it was piloting a pre-examination retirement plan compliance program beginning this month. This program involves the IRS notifying an employer by letter in advance that the employer’s retirement plan was selected for an upcoming examination.
The letter gives the employer a 90-day window to review its retirement plan’s document and operations to determine if they meet all current tax law requirements. If the employer does not respond within 90 days, the IRS will contact the employer to schedule an examination.
If the employer’s review reveals mistakes in the plan document or operations, the employer may be able to self-correct these mistakes using the IRS Voluntary Compliance Program. The IRS Voluntary Compliance Program is a formal program that has been in place for a number of years that provides a mechanism for employers to correct errors that occur in retirement plan operations. It is described in IRS Revenue Procedure 2021-30.
At the end of the 90-day window, the employer should provide a summary of the plan review to the IRS which will then determine if it agrees with the employer’s conclusions including whether the employer appropriately self-corrected any mistakes. The IRS will then issue a closing letter or conduct either a limited or full scope examination. The IRS stated that if the employer finds mistakes during the review that aren’t eligible to be self-corrected, the employer can request a closing agreement. The IRS will use the Voluntary Compliance Program fee structure to determine the sanction amount (penalty) the employer will pay under a closing agreement.
We have seen employers that do not prioritize or even ignore letters from the IRS. This is an instance where immediate attention can pay dividends. If issues are found by the employer during the 90-day window, it is likely that the cost of self-correction could be significantly less than if discovered by the IRS on audit.