EP Examination Process Guide

 

The Employee Plans Examination Process Guide clarifies the steps in the examination process and introduces resources for retirement plan compliance.

Section 1 - Overview of EP Examinations

A general explanation of the EP Examination process from the initial contact through conclusion. It explains general examination techniques and procedures used to conduct examinations of qualified retirement plans.

Section 2 - Initiation of an Examination

A general explanation and examples of the techniques and procedures used to select EP examinations, contact taxpayers and their representatives, schedule appointments, and request initial information. This section also contains a description of your rights as a taxpayer to be informed of the EP examination process.

Initial Contact Letter

Letter 6031 is used to notify taxpayers of an examination and request information that is to be available at the audit appointment.

Representation during the exam

These forms and publications discuss who can represent a taxpayer before the IRS and what forms and documents are used to authorize a person to represent a taxpayer.

Forms:

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Section 3 - Communications During Examination

This section of the Guide provides a general explanation of the techniques and procedures used during an EP examination to effectively communicate with taxpayers and their representatives. There are also examples of communications involving compliance issues that may occur during examinations.

Samples of communications that may occur during an examination

  • Letter 6031, Initial Exam Appointment
    This letter is an initial contact letter for examinations.
     
  • Letter 1346-J, Employee Plans Prior Year, Subsequent Year and Related Return Pick-Up
    This letter is used to expand a current examination to a prior/subsequent year or a related return.
     
  • Form 4564, Information Document Request (IDR)
    Form 4564 is used to request additional information during an examination.
     
  • Letter 1014-A, Taxpayer Notification of Examination Delay
    Letter Informing Taxpayer of Delay in Examination.
     
  • Letter 907-A , TE/GE Request to Extend Statute
    This letter is used to extend the statute of limitations during a plan examination.
     
  • Letter 5798, TE/GE Information Document Request Extension Notice
    This is a TE/GE examination notice informing the taxpayer that the IRS is granting an extension to submit all the information requested in the IDR.

Notification of the status of an examination

EP agents are expected to keep the plan sponsor or the representative current with the status of the examination by telephone or written notice. However, if a reasonable period of time has passed and you have not received an information document request (requesting some additional data) or a closing letter, a follow-up telephone call is appropriate. An examination closing letter should be issued within a reasonable period of time after the case is closed. Again, if a closing letter is not received within this time period, a follow-up telephone call is appropriate.

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Section 4 - Audit Guidelines

Below is a general overview of the EP Examination procedures for audits of Form 5500, Annual Return/Report of Employee Benefit Plan:

  • Internal Revenue Manual (IRM) 4.71.1
     
  • Form 5773-A , Employee Plans Workpaper Summary
    The Form 5773-A is a workpaper summary used for all EP examinations. It contains a list of procedural and technical reminders.
  • Form 6533, Referral to the Pension Benefit Guaranty Corporation
    This form must be completed by the EP agent on an examination of certain retirement plans. Any response that falls in the far right column requires a referral to the Pension Benefit Guaranty Corporation.

Specialized topics

The Employee Plans Examination Guidelines provide guidance for Employee Plans specialists on specific technical topics relating to qualified retirement plans.

Because all retirement plan examinations are different, these guidelines are not meant to cover all situations, but are a guide and reference for Employee Plans examiners. The examiner may need to modify the techniques depending on the examination issues.

These guidelines are not a comprehensive statement of the IRS legal position on the issues covered and cannot be relied upon or cited as authority. They are for assisting the examiner in performing an audit of certain issues. Each issue may not be relevant in every examination.

Subject

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Section 5 - Resolution of Issues and Closing the Examination

Resolving issues

This section explores the resources and procedures available to a plan sponsor/authorized representative and EP agent to help resolve examination issues.

There are two types of cases:

  • One where the plan sponsor or authorized representative and the agent agree on the issues and the resolution, and
  • The other is where the plan sponsor or authorized representative and the agent disagree on the issue or resolution.

Initially, the plan sponsor or authorized representative and the EP agent should share their positions in a respectful, non-confrontational manner. It is recommended that each person's positions should cite the relevant laws and any factual or legal documentation (i.e., Laws, Regulations, Revenue Rulings, General Counsel Memorandums or Court Cases), which support that position. One of the most important parts of the issue resolution process is establishing and agreeing to the issues and the facts. The facts should be established before it is determined that an error occurred.

Below are some informal and formal ways to assist in resolving technical issues.

  • It is helpful to address the facts and issues verbally first.
  • Next, each party can explain their position in writing.
  • Finally, the plan sponsor or authorized representative and the EP agent can have a face-to-face (or virtual) meeting to try to resolve any differences.

These steps should resolve most differences of opinion. However, you may encounter a situation where you believe the EP agent is being unreasonable, sufficient guidance isn't available or you disagree with the way the EP agent is interpreting or applying the available guidance. If agreement can't be reached, you should request a conference with the agent's manager.

This conference will provide an opportunity to revisit all the facts, documentation and applicable law. If the issues can't be resolved at this conference, the manager can request Technical Assistance or Technical Advice, as discussed below.

Agreeing to the issues and resolution could result in a closing agreement, which would correct the errors and preserve tax benefits for plan participants and sponsors. The fee for the closing agreement is higher than the fee available under the Voluntary Correction Program (VCP) but less than the cost of plan disqualification. The closing agreement falls under our Audit Closing Agreement Program (Audit CAP) and is part of the Employee Plans Compliance Resolution System (EPCRS).

Technical Assistance/Technical Advice

Technical Assistance is an informal process where a written request is made to Technical Review or Area Counsel for technical assistance. Area Counsel will provide an interpretation of law. The Review Staff can advise and assist agents and managers on technical and procedural issues.

Technical Advice is a formal process where written guidance is provided in the form of a memorandum furnished by the Office of Associate Chief Counsel (Employee Benefits, Exempt Organizations, and Employment Taxes) upon the request of an EP Examinations area manager. In this process the plan sponsor or authorized representative and the EP agent submit a memorandum requesting guidance based on the Issues/Facts, Applicable Law, Government's Position and the Taxpayer's Position. Note: Although this may seem like a simple resolution, these types of requests can take several years to resolve. Revenue Procedure 2021-2 sets forth the procedures for requesting Technical Advice.

Can the parties agree to disagree, so that the process can be streamlined?

No, generally, EP agents are required to explore all resolution processes before disqualification or submitting the case for Technical Advice.

Are there other issue resolution programs available to Plan Sponsors or Authorized Representatives?

The answer to this question depends on whether the issue is a Qualification Issue or Non-Qualification Issue.

Qualification/Non-qualification issues

Qualification Failures

A qualification failure means any failure that adversely affects the qualification of a plan. A qualification failure (disqualification of a plan) can result in unfavorable consequences to the plan sponsor and the participants. The deductions taken on the return may not be allowed, trust earnings are taxable, some of the benefits for the participant become immediately taxable, and other favorable tax benefits such as rollover of distributions are not available.

Some examples of what will cause a plan disqualification are:

  • the employer failed to timely amend the plan for a law change.
  • the plan fails to satisfy the minimum coverage requirements.
  • the contributions or benefits are determined to be discriminatory in favor of highly compensated employees or owners.
  • the plan fails to satisfy the minimum vesting standards.
  • the contribution or benefits for the benefit of one or more participants exceed the maximum permitted levels.

The manager or EP agent may suggest correcting the violation or operational failure using EPCRS including the Self-Correction Program (SCP).

EPCRS allows plan errors to be corrected without disqualification of the plan. Two of the programs are the Self-Correction Program (SCP) and the Audit Closing Agreement Program (Audit CAP).

The SCP is a voluntary employer-initiated program that does not involve IRS approval. However, the EP agent can use this method to correct insignificant operational qualification errors found during an examination. The plan sponsor must correct the errors. There is no sanction or closing agreement involved. This method requires that the plan sponsor have established practices and procedures in place to ensure the plan operates properly. These practices and procedures must be routinely followed.

The Audit CAP is a method of correcting qualification errors discovered by an EP agent during an examination of a plan. This procedure requires the plan sponsor to correct the qualification error, pay a sanction to the U.S. Treasury and enter into a closing agreement with the IRS. Practices and procedures to ensure that the plan operates properly are also considered during the Audit CAP.

For additional information on EPCRS, see Correcting Plan Errors.

Nonqualification Failures

An EP agent may find violations that do not affect the qualification of a plan. Most nonqualification failures or violations can be corrected through specific correction methods. An EP agent can solicit either excise taxes or income taxes.

Excise Taxes:

Generally, examples of violations which will result in excise taxes being assessed are:

  • The employer failing to make the necessary contribution.
  • The employer making contributions greater than the maximum allowed/ deductible amount.
  • The trust failing to make the minimum distributions required by the IRC.
  • The trust participating in a prohibited transaction.
  • If an Employee Stock Ownership Plan (ESOP) disposes of certain employer securities within three years.
  • Failure to return excess contributions timely in a 401(k) plan.
  • The employer failing to report a reversion upon plan termination.

Income Taxes:

EP examinations can give rise to additional income taxes on the part of plan sponsors or plan participants. This type of tax adjustment is commonly referred to as a Discrepancy Adjustment.

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Section 6 – Appeals Process

This section is a general explanation of the appeals process, the status of a plan during a pending appeal, the appeals process for discrepancy adjustments, the appeals process for excise taxes, and the appeals process for unrelated business taxable income.

Statutes

This section provides a discussion of the statute of limitations on tax-exempt trusts, prohibited transactions, procedures used by the IRS when protecting a statute, and various publications about statutes.

The Internal Revenue Service (IRS) makes every effort to examine tax returns as soon as possible after they're filed. To ensure timely tax examinations, Congress has set deadlines for assessing taxes and making refunds or credit of tax. These deadlines are called statutes of limitations. Without statutes of limitations, a tax return could be examined and tax assessed, refunded, or credited at any time, regardless of when the return was filed.

Statutes of limitations generally limit the time the IRS has to make tax assessments to three years after a return is due or filed, whichever is later. The date is also referred to as the statute expiration date. Statute of limitations will also limit the time you have to file a claim for credit or refund.

Congress, recognizing that additional time may sometimes be needed to fairly resolve a tax examination, has provided for extending the statutory period by written agreement between you and the IRS. These agreements, Form 872, Consent to Extend the Time to Assess Tax, are called "consents" and generally apply to all taxes except estate tax. Notification is usually made by sending Letter 907, with the most recently revised Publication 1035, Extending the Tax Assessment Period PDF, and the applicable agreements.

Letter 907 advises the taxpayer they have the right to refuse to extend the limitation period, that the extension be limited to particular issues, and that the limitation period can be limited to a specific date.

There are two basic kinds of consents:

  • the fixed-date consent, and 
  • the open-ended consent.

The fixed-date consent, obtained by filing a Form 872 or 872-H, sets a specific expiration date for the extension of the statute, and the date is shown on the consent form. The open-ended consent, obtained by filing a Form 872-A, Special Consent to Extend the Time to Assess Tax, extends the statute for an indefinite length of time (usually until 90 days after the taxpayer or the IRS sends the prescribed notice ending the agreement). If both parties agree, consent agreements may also limit further examination or appeal activities to specific tax issues. These agreements are called "restricted consents" and can have either a fixed or open-ended date of expiration.

A restricted consent is used to extend the statute of limitations for specific items on the return. The statute will not be extended for any item except those covered by the restrictive language on the consent.

If you choose not to sign the consent, the IRS will usually take the necessary steps to protect the government's interest by assessing any tax determined to be owed. This process begins with the issuance of a Statutory Notice of Deficiency.

A Statutory Notice of Deficiency is not an assessment of tax nor does it require you to make immediate payment. It is a proposed deficiency which generally gives you 90 days (150 days if the notice was addressed to a person outside the United States) to agree to the deficiency or file a petition with the Court for a re-determination of the deficiency. During this period, you may ask Appeals to reconsider the case. The reconsideration does not extend the 90-day period you have for filing a petition with the Court. The Notice of Deficiency can only be withdrawn under certain circumstances if both parties agree. Additional information concerning the Notice of Deficiency can be found in Publication 1035 PDF.

Generally, there are five types of tax returns over which the EP area has jurisdiction.

IRS Publications on Taxpayer Rights and Appeals

IRS publications on taxpayer rights, appeal rights, and the appeal procedures.

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