Why my plan is chosen for the audit? Did I do something wrong?
The IRS can audit or examine a plan at any time. Even though red flags on the 5500 or on targeted compliance questionnaires can trigger an IRS examination, in most cases plans are randomly selected for an IRS audit.
If my plan is chosen for the IRS audit, what should I do?
First of all, you will receive an IRS information request letter (letter 1346) to notify you that your qualified retirement plan with this plan # for such plan year is selected for an audit. In the letter, multiple documents are requested:
- The plan document, the related amendments, and the required annual notices;
- Contributions allocation and contribution deposit confirmation;
- Employee census information, including the W2s or payroll reports;
- Annual valuation reports including non-discrimination test results;
- Plan account statements or the participant account statements;
- Plan distributions (1099R records);
- Plan loans;
- Form 5500.
Upon receipt of the letter, it is important to gather all the requested documents and label them in the order in which the letter requests them. If you are not sure what to do, it is recommended to have your TPA (third party plan administrator) involved.
Second, IRS will propose a date to come to the plan sponsor’s office for the audit.
Who can represent the plan sponsor during the audit?
You can use Form 2848 “Power of Attorney and Declaration of Representative” to authorize an attorney, certified public accountant (CPA), enrolled agent, enrolled actuary, enrolled retirement plan agent (ERPA) or other qualified person to represent a taxpayer before the IRS. Please note that the form should be submitted to the IRS agent in advance.
For more detailed information, you can refer to the IRS website below:
https://www.irs.gov/retirement-plans/ep-examination-process-guide
IRS Program on Retirement Plans for Small Employers and Self-Employed Video
IRS Profit-Sharing Plans video
https://www.irsvideos.gov/Business/RetirementPlans/WhatYouShouldKnowAboutRetirementPlans?part=1
IRS 401(k) Plans video
https://www.irsvideos.gov/Business/RetirementPlans/WhatYouShouldKnowAboutRetirementPlans?l=en-US
IRS Defined Benefit Plans video
https://www.irsvideos.gov/Business/RetirementPlans/WhatYouShouldKnowAboutRetirementPlans?l=en-US