Recently, the IRS announced phase two of its expansion of the Pre-Examination Compliance Pilot Program. Under the pilot program, an employer may limit or entirely avoid an impending IRS audit if they promptly correct any identified errors via the IRS’s Self Correction Program (SCP). During phase two, the IRS will notify employers by letter that their retirement plan was selected for upcoming examination. The employer then has 90 days to review their plan’s documents and operations to determine if they meet current tax code requirements.
If the employer identifies any errors, they may self-correct the errors under the SCP. Errors that aren’t eligible for correction under the SCP can be corrected by requesting a closing agreement, and the IRS will use the favorable Voluntary Correction Program fee structure to determine the sanction amount payable.
The IRS will review the documentation submitted in the voluntary correction process, and if the IRS agrees with the employer’s self-corrections, it may issue a closing letter, avoiding audit altogether, or it may decide to conduct a limited scope audit instead of a full scope audit.
In short, the expansion and continuation of the pilot program can significantly reduce the disruption and cost associated with an IRS audit by focusing on internal audit and self-correction. Employers’ continued participation in the program may result in the IRS continuing the program as part of its formal compliance strategy.
If you are one of the employers selected for participation in the program and receive a letter from the IRS Employer Plans division regarding a retirement plan audit, do not delay. Work with plan counsel and administrators to review your plan’s documents and operations, and correct any issues quickly, ideally within the 90-day window.
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