What Triggers an IRS Audit of a Retirement Plan?
The IRS does not disclose exact audit triggers. Employers generally cannot predict whether a plan will be selected for review when filing the Form 5500, which reports financial and compliance information for employee benefit plans. The IRS reviews these filings, identifying potential red flags such as discrepancies in plan assets, inconsistencies in reporting, or evidence of mishandling funds.
Audits may also be prompted by independent auditors’ notes on Form 5500 filings for larger plans or by employee complaints to the Department of Labor (DOL), which can be referred to the IRS. Some correspondence from the IRS is routine and not a full audit but a request for clarification or missing filings.
Initial Steps When an Audit Notice is Received
Upon receiving an audit notice, the first step for any employer is to engage ERISA counsel. The audit will typically begin with a formal letter that includes an Information and Document Request (IDR), requesting documents such as signed plan documents and records from the past three plan years.
Legal counsel can:
- Communicate with the IRS on behalf of the employer.
- Request extensions for responding to IDRs.
- Ensure that employers provide only requested information without volunteering unnecessary details.
Proper legal representation helps narrow the scope of the audit and protects the employer from inadvertently expanding it.
What Employers Can Expect During an IRS Audit
A full IRS audit usually includes:
- A review of plan documents and records for three years (current year and prior two).
- Verification of financial and compliance information.
- A formal interview with a designated employer contact, such as a CEO, CFO, or HR director.
ERISA counsel can coach and prepare employees for interviews, ensuring that they answer only the questions asked, maintaining a focused and efficient audit process.
Preparing for an Audit Before It Begins
Preparation is critical to reduce stress and manage compliance risks:
- Notify internal teams and professionals, including the plan committee, TPA, financial custodian, and investment advisor.
- Gather required documents, such as plan documents, employee census data, and filings.
- Identify minor compliance failures that may be self-corrected during the audit.
Employers should understand that some compliance failures cannot be corrected independently once an audit begins and may require formal correction under IRS guidance.
Common Missteps Employers Should Avoid
- Providing more information than requested in the IDR.
- Attempting to communicate directly with the IRS without legal representation.
- Allowing internal stress or panic to interfere with proper audit management.
Following counsel guidance ensures that the audit remains focused and minimizes potential penalties.
Key Takeaways for Employers Facing an IRS Audit
Doll Lank emphasizes:
- Call an ERISA attorney first.
Kathleen Salas Bass adds:
- Do not speak to the IRS or provide documents without legal guidance.
Engaging qualified counsel early and following their advice is the most effective way to navigate an audit successfully, reduce stress, and protect the plan and its participants.
Conclusion: Navigating IRS Audits with Confidence
IRS audits of retirement plans can be intimidating, but careful preparation, timely engagement with legal counsel, and collaboration with internal and external professionals help employers manage the process efficiently.
For assistance with audit preparation or compliance matters, visit klblawgroup.com to connect with Doll Lank, Kathleen Salas Bass, and their team.