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IRS Audits: Shifting Sands, but Still a Useful Tool

Years ago, the watchword was that the IRS was making an effort to be kinder and gentler. Many may want to debate that, but the IRS does perform functions intended to be helpful — and a Nov. 14 NTSA webcast discussed one of them.

In “IRS Audits: A Necessary Evil,” Ed Salyers, who was a longtime Senior Employee Plans Specialist in the IRS Tax Exempt and Governmental Entities (TEGE) Division and now runs his own CPA firm, discussed audits that the IRS Employee Plans (EP) Office conducts and changes at the EP office. That office reviews retirement plans’ operations in order to promote voluntary compliance and make sure they are operating within the confines of plan terms, as well as law and regulation.
Why Are EP Audits Necessary?

Salyers said that EP audits can help to make sure that plan operation remains in compliance, noting that when there is no regulatory enforcement, “things go off the rails quickly.” EP audits help good professionals, he argues, because they help professionals and employers know what type of issues non-audit reviews of plans should address for internal control purposes.

But that’s not all. Salyers also suggested that EP audits can be good for business because they:

  • help an enterprise to not lose business to less scrupulous competitors;
  • increase the chances for involvement with a client; and
  • help the client to listen to the advice a service provider may give them.

EP Audit Selection

Salyers discussed the way that plans are chosen for audit. Among the triggers, he said, are distribution errors, plan document errors, compensation errors, limitation errors and eligibility errors.

Distribution errors. Such errors, Salyers said, provide auditors “with something they can pull from data,” adding, “I see this as something that gets a foot in the door” for an auditor.

Among the ways that the IRS can be alerted to distribution errors are: 

  • examination of Schedule H of the Form 5500;
  • looking at required minimum distributions and missing participants;
  • errors in calculating distribution amounts;
  • failure to obtain spousal consent;
  • hardship distribution errors;
  • impermissible in-service distributions; and
  • loan failures.

Plan document errors. Such errors are “pretty common,” Salyers said. He said that plan document errors start with:

  • failure to timely amend;
  • failure to follow written plan;
  • payroll problems, such as the payroll and HR system not being matched to the document requirements; and
  • documents being changed so that they no longer match operations.

Best practices that will help in avoiding such errors, Salyers suggested, include:

  • Having a system in place to monitor plan changes and compare to operation.
  • Keeping signed copies of plan and all amendments.
  • Making sure the SPD, website, orientation materials and employee handbooks match the plan document.
  • Having a system in place to monitor plan changes and compare to operation.

Compensation errors. This is one of the top failures for which taxpayers turn to the IRS  voluntary compliance program (VCP), Salyers said. “It’s important that everyone be on board regarding what forms of compensation are provided, Salyers said.

Limitation errors. Salyers said that he usually sees limitation errors when a client is handling plan administration themselves. “HR really doesn’t have time to administer plans,” he said, owing to their day-to-day functions. “This gives rise to errors,” he said.

Eligibility errors. The EP office looks for errors concerning rehires in audits, Salyers warned. Among the other failures that can result in eligibility errors are:

  • failure to include eligible employees
  • failure to implement deferral options when eligible
  • improper determination of hours of service or elapse time rules
  • auto enrollment failures
  • universal availability errors; and
  • allowing employees to participate earlier than plan requires

Changes in the EP Office

Salyers outlined changes to the EP office that have directly affected what it does and the services it can provide.

A major factor behind those changes, Salyers said, is the funding the IRS receives. In fact, he said, funding “probably has the biggest impact” on the EP office. Cuts in funding, he said, has resulted in EP having to change how it delivers services, and in turn have a direct impact on service providers and their clients.

For instance, observed Salyers, reduced funding has resulted in their being no major hires for more than 15 years, and employees not being replaced as they retire. However, he added, despite EP having lost “a tremendous number of experienced employees,” it still has quality personnel, just not as many.

Budget and personnel cuts have resulted in EP and TEGE “drastically curtailing” their outreach, Salyers said, including the disbanding of the compliance planning groups — which served 401(k)s, 403(b)s and 457 plans — and also have changed the ways in which auditors are trained. Among those changes, he said, is cross-training employees to perform examinations as well as determinations, as well as providing “just in time” training, which he described as “somewhat hit or miss.”

Changing the way in which audits are conducted is another manifestation of recent trends and developments and their effects. For instance, Salyers said, audits by correspondence rather than in person “may come into more usage.”

Beyond the EP

The effect of factors affecting the EP Office and the changes they have set in motion reach beyond its four walls, Salyers said, also affecting service providers and, in turn, their clients. These include:

Inexperienced auditors. Most determination agents have not conducted audits, he said.

Agents not being local. Sometimes, a service provider may have to work with an agent who is not reasonably local to it and its clients.

Correspondence audits. Conducting audits by correspondence may not only make them more widespread, also may make them more focused and increase the number of audits conducted.

Webcast Available

The NTSA Webcast “IRS Audits: A Necessary Evil” is available on demand through Nov. 13, 2019. To register, click here.