The IRS has announced the implementation of a 90-Day Pre-Examination Compliance Pilot program in its Employee Plans newsletter dated June 5, 2022 (“the Pilot Program). When the IRS identifies a retirement plan for an audit, it will first send a letter to the plan sponsor of the retirement plan. The letter will inform the plan sponsor that the plan has been selected for audit and advise that it has 90 days to identify and voluntarily correct any compliance issues with the plan. The plan sponsor then can report any corrective actions it takes to the IRS within 90 days.
The Pilot Plan is a major change to the previous policy of the IRS, which allowed voluntary corrective action only until the IRS identified the plan for audit. It also contains significant incentives for plan sponsors to take advantage of the pre-audit voluntary correction procedures.
For instance, plan sponsors participating in the Pilot Plan will experience reduced sanctions. Traditionally, the IRS calculated sanctions under its Audit CAP program based on the nature, extent, and severity of the violations and a percentage of plan assets, which could result in very high-dollar sanctions. Now, if the plan sponsor participates in the Pilot Program, the IRS will not assess sanctions for violations that are eligible for self-correction and will assess sanctions for voluntary corrective action based on user fees for that program. Those fees currently are a maximum of $3,500, which is substantially less than most Audit CAP fees.
Another benefit of participating in and complying with the Pilot Plan is that the plan sponsor’s response to the initial letter could result in something less than a full IRS audit. For example, the response could cause the IRS to issue a closing letter or conduct a limited scope audit instead of a full scope audit in some circumstances.
As a result of this major development, plan sponsors that receive an initial letter from the IRS should take immediate steps to identify compliance issues, take voluntary corrective action, and prepare a summary of those issues and actions for the IRS. In addition, plans should prioritize any compliance errors to ensure that they can successfully resolve them within the 90-day timeframe and take advantage of the benefits of the Pilot Program.
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