Self-Auditing Crucial as IRS Raises Scrutiny

Wise companies know how to police themselves for potential problems in their employee benefit plans. But those procedures are even more important now as the IRS ramps up its employee benefit plan audits this month.

Thanks to an increased budget, the agency has hired 50 examiners and expects to conduct audits of 10,000 plans next year, up 10 percent from this year. The number of IRS inquiries—the step that precedes a potential audit—will jump more than sixfold from 300 this year to 2,000 next year.

The agency is stepping up its compliance efforts after focusing much of its time over the past couple of years on guidance and education, says Michael Julianelle, director of employee plan examinations. The IRS’ increased focus on enforcement means that at the very least, companies need to be prepared to demonstrate that they have procedures in place to detect problems within their employee benefit plans, says Amy Moore, a partner at the law firm of Covington & Burling. “The IRS auditors would rather hear that you have been careful and conscientious and someone just failed to follow procedures than that you are careless and have no procedures,” she says.

Having a self-auditing procedure in place is particularly crucial for large employers, for whom audits can often take more than a year, says Don Stone, president of Plan Sponsor Advisors, a Chicago-based consulting firm. On average, 60 percent of audits of large-company plans find some issue, and the IRS is hoping that the percentage will increase as it makes its exams more focused.

“A lot of the larger employers are realizing they need to get their house in order before the IRS comes knocking, because it’s a big time burner when they come,” he says. “It can shut down your whole human resources department.”

One area the IRS always looks at is whether the company has followed its own policy statements for its retirement plans, Julianelle says. “We will always look at how you wanted your plan to look and make sure you followed your own road map,” he says. The agency typically refers to past common mistakes made by plan sponsors when it conducts its audits, he says, adding that the 10 most common mistakes are posted on the IRS’ Web site.

For example, one common audit issue mentioned on the Web site is when companies are acquired and do not credit employees from the acquired company with the proper years of service. Another example is making sure that when employees retire, they receive the proper notifications about their options. “In the pension world, nine out of 10 audits find this mistake,” says Joe Hessenthaler, a principal at Towers Perrin.

Experts advise employers that do discover problems when conducting self-audits to take advantage of the IRS’ Employee Plans Compliance Resolution System, a program that lets employers voluntarily report issues and get time to correct them. “The whole point of the program is that if you find the issues on your own, you can correct your own mistakes,” Hessenthaler says. There are more egregious errors for which a company may still have to pay a fine, he says, “but the IRS tends to be more lenient if you make a good face effort.”

—Jessica Marquez