What to Do When You Get an Audit Notice from the IRS or DOL… Besides Panic! by Ilene Ferenczy
Both the Internal Revenue Service (IRS) and the U.S. Department of Labor (DOL) have jurisdiction to oversee retirement plan operations. In general, the IRS wants to make sure that plans comply with the myriad rules in the Internal Revenue Code (the Code) that relate to tax deductions and income tax deferral, whereas the DOL cares most about making sure the money is where it should be, and that participants’ rights are being protected.
Both the IRS and DOL review retirement plans to make sure that they are operating properly. (The DOL calls these “investigations,” while the IRS calls them “audits” or “examinations.”) Both the DOL and the IRS initiate these reviews by sending out letters to the plan sponsor, advising that the plan is being looked at. If you get one of these letters, what should you do?
First and foremost, don’t ignore the notice! We have handled many situations in which the plan sponsor has completely disregarded a letter from the government. Perhaps this occurs because people are busy or because they do not understand what the letter is saying. However, the general rule is: if you hear from the IRS or the DOL, contact your third party administrator (TPA), accountant, or lawyer immediately. This advice is particularly important when the communication relates to an in-person plan review.
Your benefits professional can tell you what needs to be done and by what deadline so that you will be properly prepared for the plan review.
Do what the notice says. If the notice states you must call the reviewer to set up a time for the examination, make the call. If it says the government representative is coming on a given day and a specific time, be ready at that time or contact the representative well in advance with a good reason why the day or time is not possible for you. If you are not in a major metropolitan area, it is not unusual for the government representative to plan to spend a week or so in your geographic area looking at several plans. If that is the case, rescheduling to a different week may be difficult.
Don’t handle this yourself. You may be the kind of person who watched Tom Hanks knock out his own tooth with an ice skate in the movie “Cast Away” and thought, “Why didn’t I ever think of doing that rather than paying for a dentist!” It is a bad idea to take care of an IRS or DOL examination of a plan yourself.
This is the time to do your homework. At the very least, you should permit your benefits professional to review what you intend to share with the government examiner to be confident that there are no red flags with what you plan to reveal. Knowing where you have weaknesses and strategically addressing them either before or as part of the meeting with the examiner may make a favorable impact upon the outcome of the process. The government knows that retirement plans are complex and reasonable mistakes are not rare. On the other hand, what you think is a “reasonable mistake” may be seen by the government as something much more serious … even a fiduciary breach or embezzlement! Let a professional assist you in attempting to make sure everything is in order. And, if it’s not, your TPA or attorney can help you to determine a strategy.
Furthermore, start your preparations earlier rather than later. The government looks askance at indications of a poorly run plan. (See the next section.)
Put your best foot forward in the meeting with the government. Good impressions of plan operations generally make the review process smoother. On the other hand, reviewers tend to view disorganization in the audit process as a sign that the plan is not well administered. While the DOL tends to have a broad approach to its examinations, the IRS commonly reviews selective areas for an indication of noncompliance. If the IRS finds no problems in its selective review, it tends to close the examination relatively quickly. The DOL will expand its already extensive investigation if it is given the impression that the plan is poorly operated.
Remember, you are not the government representative’s first rodeo. In particular, DOL investigators are usually lawyers, and the DOL investigation process often is less casual than an IRS review. But both the DOL and IRS reviewers look at retirement plans day in and day out, and they have seen lots of really bad situations. So, do not take this interaction lightly and be careful of looking like you don’t care if your plan is well operated or not. This is serious stuff, and you should act like it.
If your plan is properly administered, there is no reason why you shouldn’t get through a government examination easily. However, you don’t want to start the process out on the wrong foot and create a difficult situation. Treat it seriously, be responsive, and get help.
Ilene Ferenczy is the Managing Partner of Ferenczy Benefits Law Center, an employee benefits law firm in Atlanta, Georgia. She advises clients on all types of employee benefit plans, particularly focusing her practice on qualified retirement plans, benefits issues in mergers and acquisitions, and advising third-party administrators of employee benefit programs on technical and practice issues.