IRS Offers Tips for Audit Preparation

August 30, 2013 ( – In a phone forum, representatives from the Internal Revenue Service (IRS) discussed how plan sponsors can prepare for and handle an audit.

The presenters of the forum, titled “IRS Audit Initiative: Tools to Prepare for an Audit,” included: Monika Templeton, director of the IRS’ Employee Plans Examinations section; Thomas Petit, Employee Plans Examinations, Gulf Coast area manager; and Alfred Sanchez, Employee Plans Examinations, Gulf Coast EPTA manager.

According to the presenters, several factors can potentially trigger an IRS audit of an employee retirement plan. These factors include a large number of separated participants not being 100% vested in the plan, a high percentage of plan assets being classified as “other” and significant distributions on income statements. In addition, top heaviness for plans, both 401(k) and for self-employed individuals, can act as triggers for an audit.

Once a plan has been chosen by the IRS to be audited, there are several examination selection methodologies that could be followed. These include risk-based compliance (with industry and plan type specific examinations), LESE projects (Learn, Educate, Self-Correct, Enforce) for small projects based on judgment sampling, referrals, an Employee Plan Team Audit (EPTA) for large case audit selection criteria, or promoter investigations and/or abusive transactions.

As to why some plans are chosen to be audited and others are not, the presenters conveyed that sometimes the selection is random, while other times the audit can be part of joint examination by either another part of the IRS or from another agency such as the U.S. Department of Labor. Initial contact from the IRS is generally carried out by phone, which is then followed up by either an appointment letter or a pre-planning meeting.

As part of the audit process, the IRS will request a review of plan records and documents. A letter will be sent to the plan and will include a detailed listing of items that the plan is required to make available to the IRS auditor. Some items may be requested for review prior to the initial appointment. The presenters advised that having all items, and having them organized, can enable the audit to move along more quickly and efficiently.

In addition, the presenters recommended that to prepare for the audit, plan sponsors should inform the relevant managers and employees (such as those from the payroll and human resource departments) of their involvement in the audit. Plan sponsors should also notify banks, vendors and other relevant organizations, and make them aware that records may be requested from them as part of the audit process. Those involved in the audit should also be prepared to explain plan terms and operations, internal administrative processes, and how plan errors are resolved via correction programs.

The phone forum also touched upon changes to IRS Revenue Procedure 2013-12, which was expanded to cover correction of 403(b) plan document failures in light of regulations now requiring written plan documents for 403(b) plans. Changes also included an IRS letter forwarding program to locate lost participants, new forms (8950 and 8951) added to streamline the IRS Voluntary Corrections Program, and miscellaneous updates to the appendices of the Procedure.

The presenters also mentioned that some common examination errors include the plan and operational definitions of the term “compensation” not being consistent, excluding eligible employees, including ineligible employees, a plan sponsor’s failure to withhold participant loan payments, and hardship distributions.

Finally, the presenters recommended that consulting the IRS’ Examination Process Guide is generally helpful for plans. The guide, which can be found here, contains 11 sections that will help plans navigate the audit process.