Retirement Plans FAQs regarding the EP Team Audit (EPTA) Program
These FAQs are designed to help employers (and their advisers) that are going through an Employee Plans Team Audit (EPTA) audit or are concerned about going through one in the future understand the process.
These frequently asked questions and answers provide general information and should not be cited as legal authority. Because these answers do not apply to every situation, yours may require additional research.
Questions should be directed to RetirementPlanQuestions@irs.gov.
- What is an EPTA audit?
An EPTA audit is a special type of pension plan audit that a team of experienced IRS employee plan agents conducts of the plan or plans of a large employer. (EPTA defines a “large employer” as an employer that maintains qualified pension plans that, in total, have at least 2,500 participants.) Agents conduct an in-depth audit of what “internal controls” an employer has and how the employer applies those controls to a specific plan or plans for a specific open year or years. The number of plans and years the IRS examines depends upon what the agents find during the initial audit. In deciding whether to expand an investigation, a key element is whether the agents are able to conclude from the initial audit that the employer has sufficient internal controls in place to avoid major mistakes and to identify and correct quickly any mistakes the internal controls reveal.
- What is the reason for the EPTA program?
The IRS Large Business and International (LB&I) Division audits the tax returns of partnerships and corporations, including Subchapter S corporations, with assets greater than $10 million. The IRS created EPTA to conduct audits of the qualified pension plans of those large employers. EPTA is designed to focus IRS resources on compliance issues that pose the greatest risk to the largest number of participants. (Plans of large employers make up a small percentage of total plans but include 60% of the participants and 70% of the assets in all plans.) Fully auditing all the plans of a large employer for all open years would consume considerable time and resources. EPTA allows the IRS to determine whether an audit of all of a large employer’s plans and all open years is necessary. By looking at the control systems that the employer has in place to avoid, discover, and correct plan document and operational problems, EPTA allows the IRS to focus its resources on areas that pose the most likelihood (risk) of having problems.
- How does the IRS determine 2,500 participants for purposes of deciding whether a plan is within the EPTA program?
The basis for the participant count is the information the plan administrator includes on the Form 5500. In the vast majority of cases, the employer sponsors at least one plan with 2,500 or more participants. In some situations, however, because EPTA is trying to parallel the LB&I universe, EPTA reaches the 2,500-participant threshold by aggregating several plans of the same employer (generally covering different participants).
- How do multiemployer plans fit within the large employer criteria?
EPTA treats a multiemployer plan as subject to EPTA when the multiemployer plan has 2,500 or more participants.
- What is the make-up of the IRS EPTA team?
A “case manager” heads each EPTA audit team. The team also includes a “team coordinator,” other experienced employee plan agents, and, frequently, specialists such as actuaries, computer audit specialists, and engineers. IRS Counsel provides legal support to EPTA and provides assistance to teams on an as-needed basis. Except for the Pacific Coast, each IRS area has its own separate EPTA group of six to eight employee benefit specialists who participate in the region’s various EPTA teams. The Pacific Coast area spreads its EPTA personnel out so there are two mini-EPTA groups within larger audit groups.
While neither the EP Area Manager nor the Director of EP Enforcement is a member of the EPTA team, one or both may participate in the opening conference with the employer whose plans the EPTA team will be examining. Participation depends on many factors including the size of the employer sponsoring the plan.
- How does the IRS select cases for EPTA?
The Internal Revenue Manual (IRM) specifies that the criteria to be used in selecting cases for EPTA are historical evidence, overall IRS objectives and risk analysis. More specifically, the criteria include, but are not limited to, emerging issues, market segment impact, SEC/government filings, Form 5500 returns (including actuarial schedules) resource location, referral information including from the Department of Labor, complaints, field input, tax shelter information, media attention, impact on plan participants, input from the EP Compliance Unit (EPCU), and withdrawal of Voluntary Correction (VCP) requests. An EPTA Case Selection Committee (CSC), made up of the EPTA National Analyst, three EPTA Area Managers and three EPTA Case Managers selects potential EPTA cases annually from all cases that meet the criteria. After the CSC selects and delegates the cases, each EPTA Area Manager determines which cases to audit in his or her area. The Area Manager determines this based on the issues identified and the availability of staff with the appropriate expertise.
- How many EPTA audits does IRS open in a year?
The IRS has historically opened over 100 EPTA audits each year. One EPTA audit can involve multiple plans. The actual number of cases opened depends on the number of continuing cases, training, available resources, the nature of the employer sponsoring the plan and the type of plan. For example, an audit of the plans of an international employer may take more time and effort than the audit of a 403(b) plan of a single employer.
- Does EPTA look at plan document compliance or operational compliance?
Review for document compliance is part of all audits that EP conducts, including those conducted under EPTA. EPTA agents examine plan documents, amendments, summary plan descriptions (SPDs), determination letters, etc. The agents make certain that the documents satisfy the qualification requirements (since the last determination letter) and that plan operations follow plan documents and the law. The agents can expand or contract the audits focus depending on what it discovers about internal controls.
- How does an EPTA audit differ from a non-EPTA audit?
The EPTA audit is a different approach to auditing plans. EPTA approaches an audit with the view that the initial investigation of the employer’s internal controls (e.g., its infrastructure for administering plans) should direct the nature and depth of the remainder of the audit. The EPTA agents are experienced auditors that are able to understand the complexities of large employer plans and are capable of identifying fundamental problems.
The non-EPTA audit focuses on specific qualification issues identified at the beginning of the audit. The non-EPTA audit’s focus might be on a specific industry, a market segment that has particular issues, or a specific problem such as defaulted loans or a merger or acquisition. The non-EPTA audit is not a team audit and does not focus on internal controls.
- Can a plan of a large employer be subject to a non-EPTA audit?
While it is possible for a plan of an employer in the EPTA universe to be subject to a non-EPTA audit, it is far more likely that any audit would be under the EPTA program.
- What role do internal controls play in EPTA?
A review of internal controls is the heart of the EPTA process (and is increasingly used in other audits). If in their initial review the agents find that the employer has checks and balances, whether automatic or mechanical, that is likely to prevent errors or quickly catch errors; the IRS will consider limiting the focus of the audit and not audit every plan and every year.
- What are internal controls?
Internal controls are the methods that the employer has in place to minimize the risk of mistakes. They can be anything from electronic systems that “talk” to each other to peer cross checks to annual reviews. The concept is that internal controls will help avoid mistakes or at least catch them quickly.
- How do EPTA agents examine internal controls?
At the beginning of an EPTA audit, the agents generally interview an employer’s human resource staff, payroll staff, plan administrators, and other responsible parties such as record keepers and paying agents. They also gather information with respect to electronic records and computer systems, and as to how one system interrelates to another. This process gives the agents a good idea, based on experience, what problems are likely to exist and forms the basis for the initial focused review. In conducting the focused review, agents look at whether the systems perform in the manner represented. If the employer indicates that it conducts regular self-audits or reviews, the agents give the employer the opportunity to share all or part of those self-audits and reviews. The EPTA website provides sample internal control questions that EP Agents could ask during their interview and examination.
IRS - Initial Actions
- What steps do EPTA agents take prior to the opening conference?
The Team Coordinator reviews the Form 5500 (including actuarial schedules), the employer’s compliance history, internal documents maintained by the IRS, information maintained by the SEC and the DOL, and information on the employer’s public website or at other public sources. The Coordinator then develops an audit plan. All of this occurs before contacting the employer.
- How does EPTA contact the employer?
Normally, an agent contacts the employer by telephone and then sends out an appointment letter. The person contacted is the person listed on the Form 5500 unless the LB&I audit team is already on the taxpayer’s site, which is frequently the case, and EPTA can utilize the LB&I contact person.
Audit Impact on Employer
- What action is the employer expected to take once contacted?
In its initial contact, the EPTA agent will tell the employer what additional information they would like to receive and arrange for an opening meeting.
- Does an employer have to produce a large amount of records before the opening meeting?
The amount of information and records asked for before the opening meeting depends on what the agents find in their review of IRS records and public records. Agents may ask an employer to provide information such as plan documents, payrolls, and electronic records.
- What happens at the opening conference?
At the opening conference, the Coordinator explains the items that the agents intend to review, the anticipated length of the audit, and the terms on which the IRS will issue Information Document Requests (IDRs or Forms 4564). The Coordinator also discusses logistical issues such building access, parking, and on-site space.
- What happens if the employer’s records are in a unique electronic form?
IRS has computer specialists experienced in dealing with a wide variety of electronic formats. Rev. Proc. 98-25 sets forth the requirements for an employer’s maintenance of tax records. The employer must keep tax records in a form capable of being processed.
- What happens if an employer’s records are at several locations?
If records are spread among locations, agents generally ask the employer to gather the information requested (usually, if possible, in electronic form) and have it available for the agents to review at the audit site. If the employer diversifies administration with little communication between sites so that gathering records is difficult, that may indicate lack of controls.
- Are there different types/depths of EPTA audits?
The length and depth of an EPTA audit is highly dependent upon what the auditor finds in the initial analysis of internal controls.
- How long does an EPTA audit take?
The length of the audit is very case specific but the ETPA audit, on average, takes about 18 months from the time agents officially contact the employer.
- How disruptive of normal business activities is an EPTA audit?
The IRS strives to disrupt normal business activities as little as possible. However, the IRS has a need to be on site and for the employer to provide documents timely. In the case of an EPTA audit, agents conduct about 80% of the work on-site. The EPTA team advises the employer of space needs and anticipated time at the opening conference.
- Does EPTA staff choose which employees to talk with or is that up to the employer?
EPTA staff asks for specific information as to substance and procedure. This may require the presence or time of the specific person who has that information.
- How many tax years does EPTA audit?
Initially, EPTA audits only one year and then decides on whether to expand the audit depending on what it finds with respect to that year and the internal controls in place.
- How does an EPTA team decide what to audit?
An EPTA team does considerable preliminary work. This work includes identifying specific areas on which to focus and discussing those areas with the Case Manager. The EPTA team expands or contracts these areas based on interviews with the taxpayer and the plan administrator.
- How does an EPTA team decide when to expand the years/plans?
The decision to expand almost always makes itself; expansion is dependent on what ETPA finds, and on the controls that are in place.
- What types of IDRs does IRS issue?
Initially, agents issue very general IDRs relating to plan documents, payroll, and census information. As agents identify issues or discrepancies, the IDRs become more specific. For example, if the agent is reviewing hardship distributions, the agent will ask for a list of participants who took hardship distributions and then for a sample of those participants request specific information regarding the hardship including the application, the proof of the hardship amount needed, and the type of hardship (medical, school, eviction, etc.).
Problems & Corrections
- If agents find a problem, do they give the employer a chance to respond before the IRS expands the audit?
The agents discuss all findings with the employer in a timely manner. As soon as agents identify an audit issue, they notify the employer and provide the employer with an opportunity to clarify the relevant facts and its position on the issue.
- What types of corrections will IRS require?
Corrections are dependent on what the agents find; however, the correction methods for the EPCRS program in Rev. Proc. 2013-12 are likely to be the minimum of what the agents require. The cost of the correction is likely to be larger than under EPCRS since the employer did not correct prior to audit. The agents are also likely to require new internal controls because of EPTA’s emphasis on preventing similar problems from recurring.
- Can an employer use EPCRS once an EPTA audit is opened? Can the employer use EPCRS for other plans or other years?
Once the IRS notifies, either by telephone or by letter, an employer that a plan has been selected for audit, the employer may no longer file a VCP for that plan for any year or issue. However, the employer may still file under EPCRS for its other plans as long as the IRS has not identified them as being under audit. In addition, the sponsor of a plan under audit can still use EPCRS programs other than the VCP. If, on audit, the IRS deems an error as insignificant, then the employer may self-correct (SCP) the error without the imposition of sanctions. If the IRS deems the error significant but the employer had significantly (at least 65%) corrected the error before the employer was contacted that the plan was to be audited, the employer may finish making the correction and will face no sanctions for that error. If on audit, the IRS identifies a significant error and the employer has not already substantially corrected it, the employer is subject to a sanction under the Audit Closing Agreement Program (CAP), which is also part of EPCRS.
- How do EPTA agents conclude a case?
Agents may close a case without identifying any proposed issues or adjustments. In that case, the IRS accepts the plan’s Form 5500 as filed. If the agents identify significant issues, the agents prepare a Notice of Proposed Issue/Adjustment (NOPA) for each issue for which there is no agreement (most issues end up with agreement). The NOPA provides a statement of relevant facts related to the issue, the legal basis for the finding, a statement of the IRS’s position, and a statement of the plan sponsor’s position (provided by the sponsor at the time the NOPA is prepared). Part of the process of the employer responding to the NOPA is a discussion on ways to resolve the issue – including use of SCP or Audit Cap. If there is no agreement and the issue is disqualifying, the issue goes to the Mandatory Review Office (MRO) as an Unagreed Case. The MRO can only address the issue, not the sanction. The MRO issues a letter to the sponsor explaining the appeals process and the employer’s litigation rights. Throughout the process, there is a continuing effort/ability to resolve the case.
- If an employer’s plan is subject to an EPTA audit, can the employer expect that the IRS will audit the plan again for some time in either another EPTA audit or a standard audit?
If the IRS has audited an employer’s plan within the last three years, a new audit is unlikely. However, if the CSC believes it should open a new case, then there can be a new audit.
- If correction includes a promise to change internal controls, does the employer have to submit future reports of the correction?
Prior to closing the audit, the auditor makes certain that the employer has made the promised corrections; thus, no future reports are required.