What to Expect When Your Plan is Audited

December 8, 2011 (PLANSPONSOR.com) – Having your retirement plan audited by the Internal Revenue Service or Department of Labor can be a stressful situation for everyone. 



During a live webcast, members of the team at Clifton Gunderson LLP explained what to expect and prepare for when receiving a plan audit notice. Following these easy tips, you can work to avoid an audit, but if you do have to go through the auditing process, it doesn’t need to be a stressful experience, especially if you are well prepared.

Michelle G. Murphy, QPA, QKA, ERPA, senior manager, employee benefit services, Clifton Gunderson LLP, provided a background on the reasons the IRS and DoL conduct audits.  

For 2011, the IRS’ audit priority areas include plans with abusive tax transactions, listed transactions substantially similar to tax avoidance transactions, Section 412(i) Excess Life Insurance deductions, S Corporation 409(p) violations, 401(k) accelerated deductions, collectively bargained welfare arrangements, abusive Roth IRA transactions, governmental plans community, international issues, plans that were part of the 401(k) Compliance Project and 403(b) plans.

Possible triggers for an audit with the DoL are complaints, rumors from newspaper reporting or general public information, responses on Form 5500, late salary deferral deposits, assets with value are not readily determinable, prohibited transactions, real estate held in a plan, employer property held in a plan, contributions of property to a plan, failure to provide blackout notice and failure to provide benefits when they are due. 

If the IRS and/or DoL are going to audit your plan, they will let you know in writing, and will also usually include an audit date in the letter. When you do receive a letter, Murphy highly encourages companies to not postpone in responding to the letter. “You should contact your adviser or the person who is most familiar with your plan,” said Murphy. “The IRS and DoL is going to be happy to work with your adviser on the audit.” This is because your adviser is the expert on your plan, and by working with your adviser, the audit process will run much more smoothly.

Another suggestion Murphy has is that you should ask your adviser if they can have the audit in their office. This way everything for your plan will be in one place with your adviser. If there is anything that comes up that the auditor may need, it will then be easily accessible. Also make sure to provide all documents the auditing agent requested prior to the audit appointment on a timely basis.

When preparing for the audit, Murphy suggests you make sure all of your plan documents are readily available. This includes:  amendments, summary of plan description, opinion and determination letters, organized requested records and agreements with service providers. Make sure all the appropriate people that work on the plan are available, including the trustee, representative with power of attorney, recordkeeper, actuary and employer personnel.

Other tips include:

•  Be prepared to explain the terms of your plan, as well as the operation of the plan in its entirety.
•  Have administration forms such as salary deferrals, distribution elections and spousal consents handy, as well as loan and hardship documentation. You may also need to explain internal administrative processes, so be ready to explain your plan practices and procedures, as well as internal controls.
•  Be able to identify any plan errors, whether they were resolved through self-correction or the Voluntary Correction Program (VCP). Include proof of corrections, unresolved errors and suggestions to correct.
•  Be ready to provide information about related employers/entities, including controlled groups, affiliated service groups and Qualified Separate Lines of Business (QSLOB). 

Kevin Wadle, CPA, senior manager, tax, Clifton  Gunderson LLP explained the actual audit process.  

During an IRS audit, the areas of review during the examination include:

•  Affects of the pension plan; 

•  Contributions, which includes whether or not the employer made a contribution in a timely manner, if the employee contribution was deposited timely and that matching contributions were made;

•  Checking on eligibility requirements;

•  Compliance testing;

•  Administration, including title to plan assets with the trustee, up-to-date plan documents, anti-cutback rules, prohibited transactions and exemptions;

•  In-service distributions, including participant loans, hardship withdrawals, required minimum distributions, QDROs and any other in-service distributions that are available; and

•  Termination distributions, which includes termination of employment, retirement, disability or death.


After the audit is complete, Wadle explained, the auditor will let you know of any open items and what else may still be needed via a written list, as well as a deadline for the open issues. “They do not indicate if they have any conclusions at the end of the appointment," said Wadle. The IRS will provide a closing letter and may also provide a preliminary letter if the audit is not closed. The DoL on the other hand, may not even provide a letter of closure if there are no issues after the audit.

If you disagree with the conclusion from the audit, Wadle stated, you have the right to ask to meet with the auditor’s supervisor. If you are still dissatisfied after meeting with the supervisor, both the IRS and the DoL have a formal appeals process. “If you agree there is a plan problem with either the IRS or DoL it may be possible to negotiate a settlement or correction with the agent or their supervisor. However, both the IRS and DoL have formal correction programs that may need to be used instead,” said Wadle.

In order to have to try and avoid the audit process, Murphy suggests you audit your plan annually. The IRS has checklists and self-help available at http://www.irs.gov/retirement/article/0,,id=214891%20,00.html. Also, make sure to follow your provider’s instructions, and ask questions. Document self-corrections, and always file the Form 5500 on time. Additionally, ensure Form 8955-SSA is filed for your plan if it is needed.