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Audit Alert!

John Iekel

The goal: no audit. But if you ARE audited, the goal is then a 0% change rate. Why 0%? It means there was nothing wrong with your plan.

So said Susan Diehl, President of PenServ Plan Services and NTSA Communications Committee Chair, in a Jan. 24 session of the 2018 NTSA Summit held in Houston Jan. 23-25. She focused on IRS audits: what may trigger one, and what may happen and what to do if one is notified that an audit is coming. But she also some tips that could keep the auditors at bay in the first place.

Why Me?

Likely the first question that occurs to one when the IRS breaks the news that an IRS auditor is on the way, it could have a variety of answers, Diehl suggested:

  • low workforce participation in the plan;
  • Forms W-2 show the potential for excessive contributions;
  • Forms W-2 issued for correction of excess deferrals;
  • service providers haven’t passed prior audits with a 0% change rate;
  • an employee complaint; or
  • it is a random audit, not in response to anything one has or has not done.
And the examination could be more involved for 403(b) plans, Deihl warned, telling attendees that information document requests (IDRs) the IRS sends 403(b) plans are longer than those it sends to 401(k) plans. Not only that, she noted, 403(b) IDRs vary based on what region of the United States one is in.

IRS Microscope

If the auditor is on the way. Said Diehl, he or she will probably ask for:

  • data files;
  • information on the payroll coding system;
  • field definitions;
  • a list of all employees;
  • information about employees; and
  • information about contributions to employee accounts.
Have copies of all plan documents a client has signed, Diehl suggested, since the IRS can go back to the start of the plan during the audit.

And once the auditor is there, Diehl said, “Be nice to the auditor!” She added that it may not be wise to use subtle tactics to shorten an audit, such as putting the auditor in an uncomfortable room and that such an approach will not work and will be counterproductive.

The Results

The most common plan errors, Diehl says, including those the IRS itself has identified, are:

  • loans, including hardship loans;
  • deferrals, including late deferrals and excess deferrals;
  • eligibility failures, including having it eligibility begin too early or too late , eligibility that was forgotten, and mishandling universal availability notice and exclusions from eligibility;
  • documentation errors;
  • erroneous calculations regarding employee and employer contributions;
  • restatements;
  • plan amendments; and
  • special 15-year catch ups.
And how do plans fare when they are audited? Diehl reported that the plans have the highest change rate — that is, the highest percentage of plans of that kind that the IRS requires to make some changes as a result of an audit — are 457 plans, 95% of which need to make changes. The rate is almost as high for 403(b) plans, Diehl said at 88%. Faring the best, she reported, are 401(k) plans, with a 40% change rate.

Fines are not unusual in the wake of an audit, Diehl indicated, reporting that 70% of plans that are audited suffer that fate.

Employer Goals

The goal for an employer, Diehl told attendees, is to attain a 0% change rate. But how to achieve that?

Diehl offered ideas for steps employers can take to be ready for an audit, if not outright reduce or eliminate the possibility that the IRS will conduct on:

  • develop internal controls and procedures;
  • review plan operations annually;
  • meet with the plan’s third party administrator annually; and
  • review plan against the more appropriate IRS checklist.
And, Diehl noted, the IRS provides examples of internal control procedures.

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