IRS enforcement initiatives was the ongoing theme of Tuesday’s meeting in Philadelphia of the Mid-Atlantic Pension Liaison Group, a small group of practitioners and IRS officials who meet regularly to interface regarding current topics of interest in the employee benefits arena. (Posts about other Pension Liaison Group meetings are here and here.) IRS officials who spoke at the meeting were Peter J. Breslin (Senior Program Manager, Examination Programs & Review & Employee Plans Team Audit), Ron Itzkowitz (Employee Plans Agent, Employee Plans Team Audit & Multi-Employer Audit Program) and Mike Sanders (EP Group Manager, Philadelphia, Focus Audit and External Audit Guide). Cathy Jones (the Employee Plans (“EP”) Mid-Atlantic Area Manager) presided.
Peter Breslin and Ron Itzkowitz gave a presentation on the Employee Plans Team Audit Program (“EPTA”). This is the program started by the IRS within the last few years which sends agents out to specifically audit large plans, e.g. 2500+ participants (“Large Plans”). (A previous post here discusses the program.) According to Mr. Breslin and Mr. Itzkowitz, 4,500 qualified plans fall into this Large Plan category. Although Large Plans represent less than 1% of the total 690,000 qualified plans, Large Plans nevertheless affect about 60% of the total qualified plan participants and hold about 70% of the total qualified plan assets. Obviously, that is a major reason why the IRS is focusing its attention on them. (Oddly enough, prior to the IRS’s restructuring, Mr. Breslin noted that the IRS gave Large Plans very little attention.)
Some of the issues EPTA agents focus on: (1) Terminations/partial terminations (potential vesting and distributions issues); (2) Acquisition issues; (3) Deferral Percentage Testing; (4) Compensation issues; (5) Plan documentation; (6) Vesting; (7) Distributions and loans; (8) Assets; and (9) Lack of internal controls.
How are plans identified for audit under EPTA? Apparently, there is a very involved process which the IRS goes through to select plans with “a high degree of potential noncompliance.” The process includes assigning points to plans based on the number of participants and the amount of plan assets and contributions, and then weighting those points based on previous audit history, type of plan, compliance data from an IRS risk assessment program and reviews of whether there are issues affecting termination, merger or funding. This information is then reviewed by a case-selection committee which chooses which plans will be audited.
On another front, Mike Sanders gave a brief overview of the Focus Audit Program (also discussed in a previous post here). This is also a relatively new IRS audit program which targets specific industries, specific types of plans, and specific issues within those industries and plans (versus a broad scope audit where all aspects of the plan are under review). Here is a rundown of the groups and issues which will be targeted:
(1) Defined Benefit Plans/health care:
- Internal Revenue Code (“Code”) section 412 – Funding and Code section 404 deductions
- Eligibility and coverage
- Distributions under Code section 417(e) (including non-cash distributions and high 25 highly compensated employee restrictions)
- Plan document issues
(2) Money Purchase Plans/Manufacturing:
- Code section 412 funding issues
- Code section 404 deduction issues
- Nondiscrimination issues
- Plan document issues
(3) Profit Sharing/Manufacturing:
- Distributions (Joint and survivor annuity requirements)
- Code section 404 deduction issues
- Nondiscrimination issues
- Plan document issues
(4) Defined Benefit/Construction:
- Investments (Large/unusual/questionable assets, affectionately referred to by the IRS as “LUQ”)
- Distributions (Code section 417(e) and joint and survivor annuity requirements)
- Code section 412 funding issues
- Plan document issues
(5) 401(k)/Finance and Insurance:
- Investments (Loans, LUQ)
- Discrimination (ADP/ACP)
- Allocations
- Plan document issues
(6) Profit Sharing/Other services (e.g. finance/insurance/technical fields/health/social services):
- Investments (loans and LUQ)
- Allocations
- Code section 401(a)(4) issues
- Plan document issues
In all of these industries, the IRS noted that focus audits will examine a different set of issues for plans that have been terminated. Also, agents in all focus audits will examine the plan documents as to whether or not they have been kept up-to-date and compliant with the laws. Mr. Sanders stated that focus audits can be expanded into a full scope audit if problems are discovered, such as plan documents which are noncompliant.
Of great interest to practitioners is the use of “Internal Control Questionnaires” by agents on audits to determine what internal controls employers have put in place to aid them in administering their qualified plans properly. These questionnaires are scheduled to be issued to the general public by late September and will be a useful tool for practitioners in helping their clients to prepare for such audits. In the meantime, practitioners present at the meeting were given a “peak” at the questionnaires which will be utilized in the audit process.
Some additional highlights:
(1) Mr. Breslin noted that overall the IRS is trying to utilize statistics and data so as to identify “problem” plans and make their audit process more focused and effective. In the future, when taxpayers receive an audit letter, the idea is that they will know that the IRS has identified some aspect of the plan (through 5500’s or other data) that could be “suspect.”
(2) Also, the IRS is finding in their audits that many plans have not been amended properly for changes in the law, particularly GUST and EGTRRA.