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IRS Pre-Audit Program for Retirement Plans

In early June, the Internal Revenue Service (IRS) announced a “Pre-Audit Compliance Pilot Program (program).” The program will notify a plan sponsor by letter that their retirement plan was selected for an upcoming examination. The goal of the program is to reduce taxpayer burden and reduce the amount of time spent on retirement plan examinations. At the end of this pilot, the IRS will evaluate the program’s effectiveness and determine if it should continue to be part of the Agency’s overall compliance strategy.

IRS Pre-Audit Letter

The letter will give a plan sponsor 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.

Should a review reveal mistakes in the plan’s documents or operations, a plan sponsor may be able to self-correct mistakes using the correction principles in the IRS’ voluntary compliance program, Employee Plans Compliance Resolution System (EPCRS). For mistakes found during a review that are not eligible to be self-corrected, a closing agreement can be requested for which the IRS will use the Voluntary Correction Program fee structure to determine the applicable penalty amount; after which, the IRS will review the submitted documentation and determine if they agree with the conclusions and if mistakes were corrected appropriately. The IRS will then either issue a closing letter or conduct a limited or full scope examination.

Next Steps for Employers

Employers should take active steps to identify, correct and prepare a summary of any compliance failures upon receiving a Pre-Audit Letter from the IRS. Employers must also be mindful of the time sensitive deadline (90 days) to comply with the request.

It is recommended that employers who receive a Pre-Audit Letter promptly contact their legal counsel to receive guidance on options for correcting mistakes and preparing any response to the letter, prior to responding to the Agency.

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