The Internal Revenue Service (“IRS”) has announced a pilot program that begins this month in which they will send letters to employers letting them know that their retirement plan has been selected for examination.

Under this new program, employers who receive the pre-examination notice will have a 90-day window to review their retirement plan’s documents and operations to see if they meet tax law requirements and notify the IRS. Employers who don’t respond within 90 days will be contacted by the IRS to schedule an examination.

What the IRS Says Employers Should Do if They Find a Compliance Mistake

According to the IRS, if an employer spots a compliance error, they should correct the error using the correction principles in the IRS’s Employee Plans Compliance Resolutions System (“EPCRS”). Under EPCRS, most errors can be self-corrected. Errors, such as those going back more than three plan years that are deemed “significant” under an IRS multi-factor test, can be corrected by paying a voluntary compliance fee ($1,500–$3,500), depending on the total amount of the retirement plan’s assets.

The Practical Implications of the Pilot Program

The IRS announcement states that the IRS will review the documentation of employers who have found and fixed errors to see “if we agree with your conclusions and that you appropriately self-corrected any mistakes.” After this review, the announcement says, “We’ll then issue a closing letter or conduct a limited or full scope examination.”

The pilot program provides employers who have been told they are about to be audited by the IRS with the opportunity to look at their retirement plan documents and operations and determine if they have any issues that need to be addressed. Doing so gives employers the ability—should they find and correct an error that requires paying a voluntary compliance fee—to limit their exposure to the voluntary compliance fee, rather than a significantly larger sanction payment that they would owe if the error were found by the IRS during the course of the audit.

What remains to be seen is the extent to which the IRS will examine the retirement plans of employers who identify matters that require correction and what the impact will be on an employer who does not identify retirement plan errors that are discovered by the IRS during an examination.