If your company’s retirement plan isn’t following the rules, the IRS is increasingly likely to notice. That’s the conclusion of a recently released report by the Treasury Inspector General for Tax Administration, or TIGTA. Given the nearly 900,000 retirement plans in existence today, that’s key.
The Employee Plans function within the IRS is charged with determining if retirement plans are complying with the tax-exempt provisions of the Internal Revenue code, as well as according to the terms of the plan document. For instance, they check that plan sponsors are making contributions as required and that assets exist to satisfy the liabilities. This is important both for corporate finance execs who want to be confident that their plans are operating legally, as well as for employees participating in the plan.
Over the past few years, the IRS’ Employee Plans function has become more adept at identifying plans that are noncompliant. As a result, the percentage of exams that led to a change in the filer’s tax returns has jumped from 47 percent in 2006 to 64 percent in 2010. That’s a positive step, as it means the IRS’ resources are focused where they’re most needed. It also means that plans (and their participants) are better protected.
The growth in the number of exams of noncompliant plans is a result of several factors. As a starting point, the IRS’ continuing analysis of historical results allows it to regularly update its knowledge of the retirement plan universe.
These types of exams typically result in more changes to the plans’ returns. In fact, in 2010, some change was made to more than 80 percent of returns examined as a result of special projects, abusive transactions or referrals. While that’s presumably not good news for the plans involved, it should help the plan participants. It also indicates this should be an area of focus for the IRS.
The IRS also analyzes retirement plans by plan type and the plan sponsors’ principal business. While these exams don’t produce the volume of changes other exams do, the rate of change has been increasing as well, as the IRS has made its sampling methods more efficient. For instance, the percentage of changes to profit-sharing plans from within the wholesale industry jumped from 23 percent in the 1990s to 40 percent between 2006 and 2010.
In addition, the IRS has boosted the number of plan examinations that involve special projects, abusive transactions and referrals. Special projects refers to plans that are selected for exams based on an analysis of historical data Big Fat Finance, combined with other information, such as changes to the tax laws. Abusive transactions are those intended to capture illegal tax benefits. Referrals can come from within the IRS or other agencies like the Department of Labor.
“In these tough economic times Big Fat Finance, 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 J. Russell George, the Treasury Inspector General for Tax Administration, in a statement announcing the report.
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