In its June 3, 2022 Employee Plans Newsletter, the IRS announced a pilot pre-examination retirement plan compliance program beginning in June 2022. Under the pilot program, the IRS will notify a qualified plan sponsor by letter that its retirement plan has been selected for an upcoming examination.
The IRS’s letter will give the plan sponsor a 90-day window to review its plan’s document and operations to determine if they meet the qualification requirements under the Internal Revenue Code. If the plan sponsor does not respond within the 90-day window, the IRS will contact the plan sponsor to schedule an examination of the plan.
If the plan sponsor elects to review its plan for compliance and discovers any plan document or operational errors, the plan sponsor may be able to self-correct these errors using the correction principles under the IRS’s voluntary compliance program set forth the Employee Plans Compliance Resolution System (EPCRS), described in Revenue Procedure 2021-30.
If a compliance issue cannot be addressed by self-correction, the plan sponsor may request a closing agreement. The IRS will use the Voluntary Correction Program fee structure to determine the sanction amount the plan sponsor will pay under the closing agreement. These VCP fees range from $1500-$3500, based on the size of the plan. With the exception of “insignificant” operational failures, any plan document or operational failure ordinarily identified during an IRS examination must be corrected under the Correction on Audit Program (Audit CAP), involving significantly greater tax sanctions. The pilot program affords the opportunity to correct compliance mistakes with significantly reduced cost.
If during the 90-day window, the plan sponsor reports qualification mistakes to the IRS from its review of the plan document and plan operations, the IRS will review the documentation submitted by the plan sponsor and determine if it agrees with the plan sponsor’s conclusions and that the mistakes were self-corrected appropriately. The IRS will then issue a closing letter or conduct either a limited or full scope examination.
The IRS’s stated goal with the pilot program is to reduce taxpayer burden and reduce the amount of time spent by the plan sponsor and the IRS on retirement plan examinations. At the end of the pilot program, the IRS intends to evaluate the pilot program’s effectiveness and determine if it should continue to be part of the IRS’s overall compliance strategy.
The pilot program affords a plan sponsor the opportunity to reduce significantly the cost of correcting plan compliance mistakes, if it self-reports under the pilot program. The scope of review of a plan’s compliance should mirror the IRS’s current audit program. A plan sponsor that receives a letter notifying it of an upcoming IRS examination should strongly consider, with the assistance of its legal and other advisors, taking advantage of the IRS’s pilot program.