Under the IRS Employee Plans Compliance Resolution System (EPCRS), as set forth in Revenue Procedure 2021-30, a plan that has been notified of an impending audit cannot remedy issues using the Voluntary Correction Program, and the ability to self-correct is extremely limited. The only remaining option is to correct issues under the Audit Closing Agreement Program (Audit CAP), which often requires the payment of costly sanctions. On June 3, 2022, the IRS Employee Plans Office announced a new program that gives plan sponsors who are notified of an upcoming audit an opportunity to disclose and remedy qualification noncompliance with the payment of greatly reduced sanctions.
Starting this month, plan sponsors may be notified by letter that their retirement plan has been selected for an examination. If a plan sponsor does not respond to the IRS within 90 days, the IRS will contact the plan sponsor to schedule an examination of the plan. In order to minimize the chance that a full examination will take place, plan sponsors should acknowledge receipt of the IRS notice and utilize the 90-day notice period to review their plan documentation and operations to identify any instances of noncompliance. Some common causes for plan noncompliance include:
- outdated plan documents that do not reflect recent changes to applicable law and regulations
- administrative and operational practices that are not in accordance with plan documentation
- noncompliance with yearly testing requirements, including Actual Deferral Percentage (ADP), Actual Contribution Percentage (ACP), Internal Revenue Code (IRC) Section 415 limitations, top-heavy, coverage and nondiscrimination testing protocols
- failure to pay required minimum distributions
- late or incomplete annual filings, including timely submission of the yearly Form 5500, audit report and required attachments.
If mistakes are discovered during the review, sponsors may self-correct under EPCRS. If the plan sponsor identifies compliance issues that are not eligible for self-correction through EPCRS, the plan sponsor can contact the IRS to request a closing agreement. If such a request is made during the 90-day notice period, the IRS will utilize the lower Voluntary Correction Program fee structure (with fees ranging from $1,500 to $3,500 based on the amount of plan assets) to determine the sanction amount instead of the higher fees in the Audit CAP fee structure protocol.
Even if plan sponsors self-correct compliance issues during the 90-day window, the IRS may still conduct an examination. The IRS will consider the plan sponsor’s response, including any documentation and correction materials it receives, in deciding whether to pursue a full or limited examination.
Failure to respond to the IRS notification within 90 days will result in a full examination of the applicable retirement plan.