Taxation with Representation

Employers who sponsor qualified retirement plans for their employees dread the "Your retirement plan has been selected for examination" [i.e., audit] letter. However, a pilot program just announced by the Internal Revenue Service (IRS) provides the potential for self-correction and/or reduced compliance fees when a plan is selected for audit – if the employer acts quickly enough.

The IRS' recently-announced 90-day Pre-Examination Compliance Pilot Program begins now, in June 2022, and grants retirement plan sponsors a 90-day grace period before an audit begins in which to identify and potentially self-correct errors. The IRS intends to evaluate the effectiveness of this pilot program and determine whether it should become a permanent part of its compliance procedures.

Before this pilot program, a plan sponsor had no chance to correct plan errors through the Voluntary Correction Program, or VCP, once notified (even verbally) of a pending audit; self-corrections under SCP were extremely limited as well. In addition, while VCP fees are set, sanctions under audit tend to be much higher if errors are found, and errors can almost always be found, due to the complexity of the IRS requirements.

Under this pilot program, the IRS will now send a plan sponsor a letter before an audit begins and allow 90 days for self-correction and potential fine reduction. The IRS' stated goal for this pilot is to reduce taxpayer burden as well as the time spent on retirement plan examinations.

What the 90-Day Grace Period Means for You

The 90-day window allows you time to conduct your own review after the IRS flags you for an audit. If you discover errors, correct them, and properly document the process of doing so, the IRS may cancel your exam. If you find errors that you cannot self-correct, you can request a closing agreement with the IRS, although you may still have to pay a (reduced) fee.

If you appropriately respond to the IRS by the conclusion of the 90-day period, the IRS will choose between (a) issuing a closing letter; (b) conducting a limited examination; or (c) conducting a full scope examination.

What to Do if You Receive a 90-Day Letter

Although the 90-day grace period is an improvement from experiencing an immediate audit and likely significant sanctions for any errors discovered, substantial review and documentation are needed to navigate and eventually exit the period with a satisfactory closing agreement. If you receive a 90-day letter or have questions about the new grace period, contact a member of the Bowles Rice Employee Benefits team. We can guide you through the process and help ensure your organization is in the best possible position when the IRS comes knocking.