IRS Employee Plans has just announced a pilot program for pre-examination compliance checks of qualified retirement plans, beginning this month. If your plan is targeted, you will receive a letter from the IRS notifying you that your retirement plan has been selected for an upcoming IRS examination. What’s new under the pilot program is that the IRS will give you 90 days to perform your own self-compliance check and determine if the plan is in compliance with current IRS guidance, with the enticement that this self-review may avoid an IRS examination.
During the 90 days, you would complete a compliance review of your plan and, if you do not find any errors, you would assert to the IRS that the plan meets current tax law requirements. Or, if you discover some matters that need correction, you may correct mistakes using the self-correction principles or the voluntary compliance program (VCP) under the IRS correction program, EPCRS. If the errors are eligible for self-correction under EPCRS, it appears that no penalty will apply. If the errors are eligible for VCP but not self-correction, the IRS may issue a closing agreement and assess a fee based on the VCP fee that would otherwise have been charged if the plan had filed a VCP application under EPCRS before this process had begun. If the IRS disagrees with the correction–or if you fail to respond to the IRS within the 90-day period–the IRS will likely schedule a limited or full-scope examination.
This is a brand-new development, and it is as yet unclear what evidence or assertion will satisfy the IRS that a plan is in full compliance to the level of averting an examination. If you receive a letter subjecting your plan to this pre-examination compliance review, it is very important that you respond to the IRS within the 90-day period. If you delay beyond the 90-day period, you may be faced with an IRS audit of your plan, which will be much more time-consuming and potentially costly.
The IRS announcement indicates that the pilot compliance program begins in June 2022. You might want to take this early opportunity to do a compliance check of your plan document and operations so you will be prepared–especially given that 90 days is not a lot of time to complete a compliance review and any related corrections.