This article originally ran on September 15, 2015.
By Linda Segal Blinn
Since the IRS’ Employee Plans Compliance Unit (EPCU) was rolled out 10 years ago, plan sponsors have become increasingly familiar with the IRS Compliance Check questionnaire.
And that is intentional, according to the August 28, 2015 IRS webcast, “Employee Plans Compliance Unit (EPCU) Updates.” As Craig Chomyok, Manager of the EPCU, notes, the IRS’ field examination staffing has been dwindling. And that is where EPCU comes in — sending a compliance check questionnaire to plan sponsors enables the IRS to identify common errors in retirement plans in a less burdensome way. According to Chomyok, plan sponsors themselves can answer many of the questions contained in a compliance check or can complete the questionnaire with the assistance of counsel at less cost than would be incurred for a full-scope IRS audit.
In the course of the webcast, Chomyok and Carla Smith, also a Manager of the EPCU, explained how the EPCU determines which projects the IRS unit should pursue.
Data Pointing the Way
The EPCU assesses available data to determine which compliance check projects are appropriate to pursue. According to Chomyok, initially the EPCU’s data analysis capabilities were limited to Form 5500 information but now extend to Forms W-2, 1099-R, and 5498.
Once the initial data research has been performed and the IRS’ Project Selection Committee has approved potential compliance check ideas, the EPCU must determine the scope of the project. Chomyok commented that if the data extends to several hundred plans, the EPCU may send a compliance check to all identified sponsors. If, however, several thousand plans have been identified, the IRS will mail the questionnaire to a statistical sample.
Comparing the Pros and Cons of a Compliance Check to an IRS Audit
If an error is discovered following the submission to the IRS of a compliance check questionnaire, a plan sponsor may be able to correct that defect by filing under the Voluntary Correction Program (VCP) under the IRS’ Employee Plans Compliance Resolution System (EPCRS). As Chomyok notes, VCP is not an option for a plan under an IRS audit — the sponsor’s only avenue would be correction through ECPRS’ Audit Closing Agreement Program (Audit CAP). Smith agrees, noting that the EPCU often recommends that a plan sponsor file a VCP application to resolve an issue that came to light during a compliance check project.
However, there is no guarantee that if a plan has already received a Compliance Check questionnaire, the plan will not receive another one. Chomyok points out that it is conceivable that a plan could receive additional compliance check questionnaires for the same tax year based on different projects the EPCU has undertaken. Who receives a compliance check is driven by data analysis, and the IRS does not cull out or coordinate among plan sponsors that already have received a different EPCU questionnaire.
Sponsors whose plans had previously been identified as having a defect during a compliance check may receive a follow-up compliance check from the EPCU to determine if the employer has corrected that defect. In contrast, an audit is more detailed and involves inspecting the plan’s books and records. However, once an audit is concluded and the IRS has issued a closing letter, Smith notes that special review would be necessary for the IRS to reopen an audit.
Growing Scope of EPCU’s Outreach Efforts
Especially considering the limited resources staffing the EPCU, Smith reports that more plan-related issues have been identified more quickly via compliance check projects than in audit activity. Since the formation of the EPCU, over 37,000 plan sponsors have been contacted in the course of more than 70 projects. IRS EPCU staff have referred 657 cases to IRS auditors.
Smith singled out the 403(b) Universal Availability Compliance Checks as a significant EPCU effort. Approximately 6,000 K-12 school districts and 330 higher education institutions were contacted to educate 403(b) sponsors about the importance of allowing all eligible employees to make deferrals to the 403(b) plan. In the course of this project, the IRS developed an administratively feasible correction for plan sponsors whose employees (which Smith noted included janitors, substitute and part-time teachers) were inappropriately excluded from the 403(b) plan.
Identifying an operational defect may lead to yet another EPCU project. For example, based on the data from the 403(b) Universal Availability K-12 Compliance Check, the IRS rolled out a second questionnaire directed at 250 K-12 school districts previously identified as not meeting the Internal Revenue Code universal availability requirements. This follow-up compliance check indicated that 40% of that group continued to have an issue operating under the universal availability rules.
Linda Segal Blinn, J.D., is vice president of Technical Services for Tax-Exempt Markets at Voya Financial. In this capacity, Blinn leverages over 25 years of experience administering and designing defined contribution plans to provide general legislative and regulatory information to assist public and non-profit employers in operating their retirement plans.
This material was created to provide accurate information on the subjects covered. It is not intended to provide specific legal, tax or other professional advice. The services of an appropriate professional should be sought regarding your individual situation. These materials are not intended to be used to avoid tax penalties, and were prepared to support the promotion or marketing of the matters addressed in this document. The taxpayer should seek advice from an independent tax advisor.
Linda is not a practicing attorney for Voya Financial.
Opinions expressed are those of the author, and do not necessarily reflect the views of NTSA, or its members.