IRS Gets Better at Catching Illegal Retirement Plans

The Internal Revenue Service has become more adept at identifying retirement plans that may violate tax laws, according to a new government report.

The report, by the Treasury Inspector General for Tax Administration, found that the IRS has improved its process for selecting potentially noncompliant retirement plans for examination. This has resulted in an increase in the percentage of examinations where the IRS detects noncompliance with the Tax Code.

The IRS examines retirement plans to determine whether the plans are operating in accordance with the tax-exempt qualification provisions of the Internal Revenue Code and within the terms of the plan document. If a retirement plan is not in compliance, the IRS works with retirement plan officials to resolve examination issues and make the plan compliant. In this way, examinations help to ensure that retirement plan participants receive the benefits the plan promises.

At the request of the IRS, TIGTA reviewed whether the processes for selecting examination cases allowed for emerging issues to be considered and took into account the risk of noncompliance for the various types of retirement plans such as 401(k) and pension plans.

“In these tough economic times, it is even more important that the IRS ensure that retirement plans comply with all applicable statutes and regulations to provide plan participants with greater assurance that promised benefits will be available upon retirement,” said TIGTA Inspector General J. Russell George in a statement. TIGTA made no recommendations in this report.

The IRS’s Employee Plans function has accomplished this improvement by developing methods for selecting examination cases that allow for emerging issues to be considered, while taking into account the risk of noncompliance for the retirement plan universe. For example, the most productive examinations (those that identify retirement plans that are noncompliant) have been the result of special projects, abusive transactions, and referrals. Over the past five years, these three areas have consistently identified the highest degree of noncompliance. In addition, the Employee Plans function’s risk-based examinations are becoming more productive based on historical results of examinations from particular market segments.

Special projects are used to strategically select examinations based on the Employee Plans function’s research program, changes made to the Annual Return/Report of Employee Benefit Plan (Form 5500) return, historical examination data, and other emerging issues such as legislative changes. In addition, the Employee Plans function participates in an IRS-wide effort to address abusive tax shelter schemes and promotions. When selecting returns to be examined, special projects and abusive transactions are given the highest priority.

The Employee Plans function receives referrals throughout the year when there are questions or concerns that employers or retirement plan sponsors may not be complying with the Internal Revenue Code sections governing employee benefit plans. Referrals originate from a variety of sources both within and outside the IRS.

The Employee Plans function also conducts risk-based targeted examinations, having identified particular market segments where it found significant noncompliance.