Employee Plan Team Audits
Prepared By: Tilda Kaplan
Mercer Human Resource Consulting
Employee Plan Team Audits
During the past year (2003)
the IRS has been using a pilot program to conduct Employee Plan Team
Audits. The pilot program became
permanent effective
Employee Plan Audit Team
Employee Plan Audit Teams
consist of a group of experienced IRS agents.
Each of the IRS’ six regional areas will have an EP Team Audit
Group. Each area will have one EP Team
Audit Group and each audit group will conduct 10-15 examinations each
year. Every team includes an experienced
benefit plan auditor, a computer audit specialist, an actuary (for defined
benefit plans), and a benefits attorney.
The total number of team members will vary depending on the size of the
employer, the number of plans involved, and the type of plans to be examined
(e.g., cash balance or ESOP). Based on
discussions with the IRS, it appears, during the pilot program, teams consisted
of as many as 12 members.
Length of Time of Audit Process
EP Audits will involve
200-300 staff days per audit as opposed to the typical audit we see now that is
5 or fewer staff days. To handle more
than one audit at a time, agents will request information from one plan while
working on another one. Auditors will go
the employer’s place of business only when requested data, documents and other
information are ready to be reviewed. To
the extent information can be downloaded (by the computer audit specialist),
audits will be conducted in the IRS offices.
What is the Purpose of these audits?
The IRS, through audits,
wants to provide the greatest protection for the largest number of plan
participants. The IRS has limited
sources, thus fewer audits have been conducted over the last years. There are approximately 4,400 single employer
qualified plans with 2,500 or more participants, representing 1% of the
universe but having 60% of the total plan participants and holding over 70% of
total plan assets.
How will the IRS select plans for ER Audit?
The initial pool of potential
plans for audit consists of 4,400 plans, as mentioned above. Points are assigned to each employer’s plan,
based on the number of participants in the plan and the dollar amount of
contributions to the plan. A plan
remains in the pool only if it has the minimum number of points. (The IRS has not identified the minimum
number).
Additional objective criteria
are then considered. If plan has
recently been audited and received a ‘no change’ letter, the chance of audit is
decreased. If plan is an ESOP or cash
balance conversion plan, the chance of audit is increased. If IRS believes employer’s industry is at
risk, chance of audit is increased. In
markets where plans with high ‘change rates’ (changes required when the plan is
audited) and low ‘reliability’ (low number of examinations by IRS), the chance
of audit is increased.
Additional subjective factors
are then considered. These subjective
factors include media reports, SEC actions, and reports from IRS field agents
regarding the employer or plan. The IRS
will look at this group and audit the employers and plans that meet the
qualifiers and select the plans to be audited focusing on the plans that are
most likely to be non-compliant.
How is the Team Audit different from a regular plan
audit?
With the EP Team Audit, the
plan sponsors receive one of two types of letters notifying them of the
audit. The difference in letters is
significant. One letter indicates the
specific plan to be audited. Once the
employer receives this letter, the plan is considered under audit and is no
longer eligible to file a submission under the Voluntary Compliance Program
(VCP). The other letter does not
indicate a specific plan; it just indicates that one of the employer’s plans is
under audit and more information is needed to determine which plan. Receipt of this letter does not bar the
employer from a VCP submission. If a VCP
submission is made before a plan is audited, the IRS will then audit one
(or more) of the plans that was not included in the submission.
Information requested will be more extensive than typical requests made in a non-EP Team Audit. The requests are based, in part on Rev. Proc 98-25, the Revenue Procedure that sets out basic requirements the IRS considers necessary when records are maintained with an automatic data processing system (e.g., recordkeeping system for DC plans).