On June 3, 2022, the Internal Revenue Service (IRS) announced the launch of a pre-examination retirement plan compliance pilot program. Under this new pilot program, the IRS will notify plan sponsors by letter 90 days before examination that their retirement plan has been selected for an upcoming inspection.
The notice letter will serve to give the plan sponsor a 90-day window to review its retirement plan documents and operations to determine if they meet current tax law requirements. Should a recipient not respond to the IRS within the 90-day window, the IRS will contact the recipient to schedule an examination, just as they would before the pilot program.
If, during the 90-day window, a plan sponsor’s review finds errors in its retirement plan’s documents or operations, these errors may be eligible for self-correction through the principles in the IRS’s Employee Plan Compliance Resolution System (EPCRS). EPCRS allows an employer to fix certain errors regarding its retirement plan.
Before this pilot program, the ability to correct errors under EPCRS was typically unavailable to employers while a plan was under IRS audit. If an audit discovered an error, the fees for correction under the IRS’s Audit Closing Agreement Program (Audit CA”) were typically much higher and less predictable than they are under EPCRS. The availability of EPCRS during the pilot program’s 90-day notification window allows employers to come into compliance with tax law requirements prior to an audit, potentially avoiding legal costs associated with an audit and the higher Audit CAP correction fees. Even if the plan sponsor’s review uncovers errors that are not available for self-correction under EPCRS, the IRS has stated that under the pilot program, the IRS will use the Voluntary Correction Program fee structure rather than the higher Audit CAP fees to determine the sanction amount the plan sponsor must pay under a closing agreement.
If a plan sponsor takes the opportunity to self-correct errors during the 90-day window, the IRS will review a plan sponsor’s documentation and determine if it agrees with the sponsor’s conclusions and corrections. After review, the IRS will either issue a closing letter or conduct a limited or full-scope examination. The IRS has stated its intention with this pilot program is to reduce taxpayer burden and to reduce the amount of time spent on retirement plan examinations.
To take full advantage of this pilot program, plan sponsors who receive a 90-day pre-examination notice should immediately begin working with attorneys and advisors to conduct a self-audit to identify and address any potential issues. This action can help sponsors avoid unpredictable and costly fees that might arise during an IRS audit.
For more information on this pilot program, please contact your primary Varnum attorney or any member of the Employee Benefits Practice Team.
This article was co-written by Michael Puro, a summer associate at Varnum in 2022. Michael is currently a student at Wayne State University Law School.