DOL and IRS Audits: Be Prepared!

John Iekel

The best defense, it is said, is a good offense. A March 31 ASPPA webinar suggested that regarding audits by the IRS and Department of Labor (DOL), that means being ready for those examinations. 

In “The IRS and DOL Are Here: How to Prepare and Conquer!”, the Ferenczy Benefits Law Center’s Ilene H. Ferenczy, Esq., CPC, APA, offers tips and suggestions regarding how to prepare for examinations of retirement plans and how they are being run. 

DOL vs. IRS

Well, not really. The two agencies look for different things and have different priorities and concerns, said Ferenczy; she discussed those distinctions and how best to prepare for their examiners. 

Why Me? 

There is a certain amount of random choosing regarding how a plan is selected for examination, said Ferenczy, adding that sometimes the agencies choose a random topic on which they want to focus. 

The DOL is most concerned that people’s rights are not being respected, said Ferenczy, while the IRS is looking for trends of behavior, and is looking to make sure that proper procedures are followed. To the IRS, success = money for the plan, she said. 

Audits

DOL. In audits, the DOL—specifically its Employee Benefits Security Administration (EBSA)—is concerned about eligibility, vesting, benefit claims and payments, and fiduciary duties, such as: 

• exclusive benefit rule;
• prudence of investments;
• prudence of administration;
• conflicts of interest; and 
• prohibited transactions, such as deposit of deferrals/loan payments.

IRS. Predictably, the IRS is more focused on tax matters, such as:  

• plan qualification, with particular attention to documents and plan operation;
• income, excise, penalty taxes; and 
• deductions.

But that’s not all the IRS is concerned about, Ferenczy suggested. They also are interested in: 

• discrimination;
• limits on benefits (under Internal revenue Code Sections 415, 402(g), 404);
• funding; and 
• eligibility and vesting.

There is one interest that EBSA and the IRS have in common: reporting and disclosure. 

If You Hear a Knock on the Door 

If you get a subpoena, said Ferenczy, “don’t be worried that it’s a hostile action,” continuing, that it’s just the DOL saying that they need information and that they can ask for it. With the DOL, “be prepared for time” in the audit process, she added. “Don’t look for it to be a six-week process. It just won’t be.” 

As for the IRS, there is a sense that you are on one side, and they are on the other. But she added that in her experience, it is less adversarial than it appears. IRS examiners are often accountants, Ferenczy said, and they have a sharp, specific focus on one or two topics. 

Keys to Success

Be prepared. Being prepared is “probably one of the most important things” one can do, said Ferenczy. And she stressed the importance of thinking strategically. 
In preparing for an audit, said Ferenczy, it is important to know what your client’s approach is so you can most effectively communicate with them. And previewing allows you to be better ready in advance and anticipate what examiners may say and do, she adds.  

Mistakes. If you are disorganized, it can lead the examiner to think that the plan is, too, Ferenczy warned. And, she suggested, if you make an error, be very careful regarding how you discuss it with your client. 

Timeliness. Don’t assume that your timeliness and that of your auditor are the same thing, Ferenczy suggested. If you are timely, doesn’t necessarily mean that the examiners will act quickly too, she adds. 

Be strategic. When dealing with problems up front, it demonstrates to examiners that you are open and honest. 

Be proactive. If there is  a problem, provide a solution, Ferenczy suggested. “Plant your seed first,” she said. 

Procedure. The DOL cares about procedure more than anything else, Ferenczy said, suggesting that one should help one’s client to articulate why something was done and why a particular decision was made. 

Penalties. Remember that the IRS can waive penalties, but cannot waive interest, nor excise taxes.