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Audit Closing Agreement Program (Audit CAP) – General Description

A plan sponsor that does not come forward to the IRS, but whose retirement plan has significant problems that are discovered by the IRS on audit or during the determination letter application process, is entitled under the audit correction program to preserve the tax benefits associated with properly maintained retirement plans. Under this program, the plan sponsor pays a reasonable sanction that is based on an amount that is directly related to the amount of tax benefits preserved. The sanction imposed will bear a reasonable relationship to the nature, extent and severity of the failure, taking into account the extent to which correction occurred before audit.

Generally, under the Audit CAP, the plan sponsor or the plan is under examination and the plan sponsor:

  • enters into a Closing Agreement with the IRS, 

  • makes correction prior to entering into the Closing Agreement, and

  • pays a sanction negotiated with the IRS.

Sanction amount

The sanction paid under Audit CAP should be greater than the fee paid under the Voluntary Correction Program (VCP). The sanction under Audit CAP is a negotiated percentage of the Maximum Payment Amount (MPA) based on the sum for all open taxable years of:

For SEPs, SIMPLE IRA plans and SARSEPs, the:

  • Additional income tax resulting from income inclusion for employees in the plan (Form 1040), including the tax on plan distributions that have been rolled over to other IRAs (and any interest and penalties applicable to the employees’ tax return).
  • Additional tax resulting from the 6% tax imposed under Internal Revenue Code Section 4973 on excess contributions to IRAs.

For 403(b) plans, the:

  • Additional income tax resulting from income inclusion for participants in the plan (Form 1040), including the tax on plan distributions that have been rolled over to other qualified trusts (and any interest and penalties applicable to the participants’ tax returns).
  • Any other tax that results from a 403(b) failure that would apply except for correction under Revenue Procedure 2008-50 or 2013-12.

For 401(k) and other types of plans with a trust, the:

  • Tax on the trust (Form 1041) (and any interest and penalties on the trust tax return).
  • Additional income tax resulting from the loss of employer deductions for plan contributions (and any interest and penalties on the plan sponsor’s tax return).
  • Additional income tax resulting from income inclusion for participants in the plan (Form 1040), including the tax on plan distributions that have been rolled over to other qualified trusts (and any interest and penalties on the participants’ tax return).

Learn more about how to correct plan errors.

Page Last Reviewed or Updated: 22-Jan-2016