In late September, IRS’ Tax Exempt and Government Entities (TEGE) issued its Work Plan for the 2018 fiscal year. The Work Plan tells us the issues the IRS will be focusing on in the coming year and how it will be using its compliance resources. The 2018 fiscal year runs from October 1, 2017 through September 30, 2018.
With the knowledge the Work Plan provides, plan sponsors and their service providers can work to ward off potential problems likely to draw the attention of the IRS. As such, I view the Work Plan as a kind of plan sponsor checklist.
In this, the first of two posts discussing the Work Plan, I focus on IRS methods. These are means the IRS will be using to find problems and to ultimately pursue correction and impose taxes and penalties for noncompliance. In the second post I will describe the specific areas of plan operations that are of interest to the IRS.
IRS Methods -- Working Smarter:
As many of you may know, IRS resources have dwindled over the years. It has fewer personnel for just about every responsibility in its portfolio. As a consequence, it has been forced to make choices about what it can and cannot do -- the things that will have priority and the things that won’t. An example is the radical changes it made to plan qualification determination letter program where letters, in general, will only be issued at the point of initial plan adoption. In short, IRS spokespersons have publicly acknowledged the agency has to find ways to work smarter and that is just what it is doing.
These are the ways the IRS has found to work smarter in 2018:
- Continuing IRS effort to make plan sponsors smarter & reduce non-compliance. The IRS calls this Knowledge Management (KM). The IRS says it will issue more “high-quality technical KM products like issue snapshots and audit tools. Planned topics include: church plan qualification requirements; the application of the regulations on qualified non-elective and qualified matching contributions; the availability of single-sum distribution options; and 60-day rollover waivers.
- Making the Voluntary Compliance Program (VCP) more efficient. This very successful and popular program under the moniker Employee Plans Correction Resolution System (EPCRS) has expanded over the year and provides significant relief for plans with operational and other errors that could impact their tax qualification. I’m proud to say that I had a very small role in getting that program going as a member of the Northeast Pension Liaison Group. The group’s white paper, written many years ago, made very modest recommendations to the IRS to establish it. The Work Plan makes clear the IRS wants to facilitate the program by providing more online guidance to the public on practices that lead to quick closures of VCP applications. The IRS expectation is that more applications will be perfected before they are submitted. This should have the effect of lightening the IRS load and have a corresponding beneficial effect for plan sponsors of reducing service provider fees for these applications. It is worth noting that in fiscal year 2017 the IRS streamlined the VCP process by adopting an electronic case management system.
- Data driven approaches to plan examinations are being refined. The IRS continues to develop data driven models to produce targets for examination by plan type and by sampling results of data queries (through models designed to test indicators of non-compliance). One can expect to see ongoing refinements in these models. This means that non-compliance that is not discovered by the plan sponsor or, if found, swept under the rug is likely to be more and more discoverable by the IRS. This puts a premium on efficient, effective, and diligent attention to compliance issues by plan sponsors. Remember, too, the EPCRS program, including VCP, is a whole lot more forgiving for errors that are “self-discovered” by plan sponsors than when those errors are found by the IRS in an examination. Proactively managing plans against this risk is almost a mandatory virtue.
- Reliance on referrals continues. The IRS continues to pursue referrals received from sources within and outside the IRS that allege possible non-compliance by a retirement plan. These referrals can come from other government agencies (e.g., the IRS and DOL have an agreement to cross-refer matters in which the other agency has a jurisdictional interest) and from participants who complain about their benefits.
Next week, in Part Two, I’ll discuss the parts of the Work Plan involving substantive issues and what can be viewed as common plan problems.
Chuck Humphrey is a consultant to Fiduciary Plan Governance and the principal of Law Offices of Charles G. Humphrey and the author of the Fiduciary Responsibility eSource available at erispedia.com. Mr. Humphrey can be reached at [email protected] or at 716-465-7505.