The Internal Revenue Service recently announced the launch of a “Pre-Examination Compliance” pilot program (“Program”) offering retirement plans the opportunity and incentive to correct plan errors in advance of an audit. The Program, which goes into effect immediately, appears to be aimed at maximizing the effectiveness of the agency’s oversight function at a time when it has limited resources for targeted plan audits.
Under the Program, the IRS will issue a letter to retirement plans selected for audit notifying the plan of the IRS’s intent to schedule an audit in 90 days. Plans in receipt of the letter may conduct an internal audit within the 90-day period. If a plan identifies an error, and the error is eligible for self-correction under the Employee Plans Compliance Resolution System (EPCRS)—for example, operational errors that occur despite the plan’s established procedures—the plan may self-correct the error in advance of the audit. The IRS then reviews and determines whether it agrees with the correction, in which case it will issue a closing letter, or whether a limited or full-scope examination is warranted.
If a plan identifies an error that is ineligible for self-correction, including plan document failures, it may apply to the IRS for a closing agreement letter through the Audit Closing Agreement Program (“CAP”). In exchange for disclosing such errors during the 90-day pre-audit period, the IRS will calculate the associated fees according to the Voluntary Correction Program (“VCP”) fee schedule, as opposed to the CAP fee schedule. Generally, VCP fees are lower than sanctions assessed under Audit CAP. (For example, the user fee under VCP for correcting the failure to adopt certain plan amendments is a maximum of $3,500, while the fee for the same error under CAP is up to $8,750. CAP sanctions for other errors may be significantly higher, depending on factors such as the severity of the failure.) It appears that once a plan receives a 90-day letter under the Pilot Program, it is considered “under examination” and thus not eligible to correct errors through VCP.
It is unclear how long the Program will be in place. The IRS stated that it will evaluate the Program’s effectiveness and determine whether it should continue to be part of the agency’s overall compliance strategy.
This publication is intended to provide general information only, and is not intended to provide legal advice. The distribution of our publications is not intended to create, and receipt of them does not constitute, an attorney-client relationship. Permission is granted to make and redistribute, without charge, copies of this entire document provided that such copies are complete and unaltered and identify Slevin & Hart, P.C. as the author. All other rights reserved.