Surviving an IRS plan audit: How one firm navigated the process

The best way to prepare for an IRS audit is by heeding the advice of an organization that has been through the ordeal.  

One such organization is Vanderbilt University & Medical Center. Vanderbilt was audited back in 2010 for issues related to its 403(b) retirement plan during the 2008 plan year.

At the National Tax-Deferred Savings Association (NTSA) 403(b) Summit, Vanderbilt’s HR assistant director, Terri N. Armstrong, shared some insight into how an IRS audit works as well as some practical tips employers can use if they ever find themselves entangled in a similar situation.

The initial request

Preparation should begin as soon as an employer receives notice that the IRS is auditing its retirement plan. When this happens, firms should contact their TPAs, attorney, plan providers as well as any necessary employees from departments such as HR, Payroll or IT.

Word of caution: The fewer employees you have talking to the IRS agent doing the audit, the more smoothly everything is likely to go.

When plans are notified about the audit, the IRS will send out one or more Information Document Requests (IDRs). What the agency sees in the IDRs will likely determine how it plans to proceed. The feds expect the information is receives from employers to be clear and concise. So employers should make sure they know exactly what type of documentation the IRS is expecting. Also, if vendors are slow or uncooperative in getting the info back to you, let the feds know about the issue ASAP.

Armstrong also urged employers to retain copies of all of the IDRs and the info they provide to the IRS because follow-up information requests may reference older IDRs.

Internal controls

During the audit, the IRS will be looking into the employer’s internal controls. This is an area where employers can really help their own cause. Armstrong said that when the agent auditing Vanderbilt’s plan starting asking about distributions, she enlisted the help of employees and wrote down the process used for each and every distribution the feds asked about.

The detail-oriented approach seemed to work in the company’s favor. As Armstrong put it: “I think that spared us from a more detailed audit.”

Some of the key internal control areas the IRS will typically look into:

• Eligibility/discrimination
• Contributions/limitations
• Vesting,
• Distributions, and Reconciliations with providers or TPAs.

The feds will also be looking to make sure that plan documents, employee handbooks and company website info are all in agreement regarding plan features and processes.

The resolution

The IRS’ audit of Vanderbilt’s plan uncovered some language deficiencies in its document about certain contracts, which led to plan amendments being made. Because of required document language and required amendments in this area, Armstrong said an attorney or a TPA was a huge help here.

The audit also led to Vanderbilt phasing out one of its plan features and making some communication changes regarding open enrollment and eligibility notices.

Ultimately, Vanderbilt was able to successfully fix errors through the IRS’ own voluntary correction program (VCP) — a tool many employers are wary of using.

One final lesson Armstrong learned as a result of the IRS audit: When employers have turnover in critical positions,  it’s crucial to get new hires trained on the audit process right from the start.