Current Internal Revenue Service (IRS) employee benefit plan examinations initiatives heading into 2016 match closely the priories announced for the year almost ended.
The main areas of examination remain commonly occurring Form 5500 Series return errors and several other broad categories of recurring errors found across 401(k), 403(b), very large plans, and multiemployer plans. These include but are not limited to improper definitions of compensation for plan deferral and matching purposes; running the plan in a way that does not conform with plan documents; investing heavily in hard-to-value assets; nondiscrimination testing errors; not recognizing the plan as a top heavy plan; untimely remittance of employee or employer contributions; and utilizing faulty participant data.
According to Lisa Beard, director of employee plans examinations within the Tax Exempt & Government Entities Division (TEGE) of the IRS, “it’s no secret we are facing our lowest funding levels since 2008—and adjusted for inflation our budget hasn’t been this low since 1998.”
“Is this impacting exams? Yes,” Beard told reporters convened for a recent webcast explaining the IRS examination priorities. “It’s one of our biggest challenges as an organization.”
The budget constraints for 2016 mean the IRS will “have to rethink some things,” Beard suggested. “For fiscal year 2016, our focus will remain on developing and refining enforcement mechanisms and enhancing voluntary compliance corrections, but we’re going to have to be mindful of our resources.”
Beard was quick to add that she doesn’t feel IRS examination quality will suffer as a result of resource scarcity, but it will make her staff’s jobs more difficult and could lead to fundamental changes in the way audits are conducted. “Moving forward, we have a really tight budget and it’s getting tighter, so we have to be careful with our travel budget,” she explains. “This means we are looking into greater use of remote examinations. Plan officials should expect to see more correspondence audits, or even a full remote examination.”
The process for more remote examinations has not been finalized, according to the IRS, but Beard did suggest some details. She said plans selected for an IRS audit will likely see audit-related records first requested and collected by an IRS staffer on site, but then the staffer will proceed to conduct the bulk of the auditing work back at IRS field office. “Then they would return to close the investigation,” Beard explains, potentially saving significant sums on travel expenses. “That’s something we’re looking at.”
Beyond its traditional auditing casework, Beard explains IRS staff “will also continue to do inter-agency referrals and other cooperation with Department of Labor enforcement efforts.” She says IRS will also take a hard look at cash balance plans in particular next year, in no small part because “they represent about a third of all DB plans that file a Form 5500 return in U.S. and we are seeing a pretty dramatic increase in the prevalence of hybrid-type cash balance plans.”
Plan officials should be aware that changes are coming to “various processes regarding electronic payments and data distribution. These are areas where we are looking forward to development in 2016,” Beard said. “We’ve had a lot of requests and discussion in these areas.”