The Department of the Treasury recently announced that it has greatly improved its ability to detect retirement plans that are noncompliant with tax-exempt qualification provisions of the Internal Revenue Code and the terms of the plan document. This conclusion is the result of a recent audit report initiated in response to a request from the IRS to review the Employee Plans function's selection methodology. 

The primary objective of the Employee Plans function is to identify noncompliant retirement plans and subsequently to work with plan officials to resolve issues brought to light, and ultimately bring the retirement plans back into compliance. Over the past several years, the Employee Plans function has improved its ability to identify non-compliant plans. For example, from 2006 to 2010, the percentage of examinations resulting in a change to the filer's tax return has risen approximately 16%. The report revealed that the significant improvement of the Employee Plans function, as revealed by this data, is the result of the IRS's continuing analysis of historical results and its commitment to increasing resources devoted to identifying noncompliant plans. 

Historical data reveals that the most productive examinations, and the most likely to uncover noncompliant plans, are those that involve special projects, abusive transactions and referrals. As a result, the IRS has begun to focus on these three types of examinations. For example, in 2010 more than 80% of examinations involving special projects, abusive transactions and referrals resulted in a change to the filer's tax return. Other plan types are receiving increased scrutiny as well, as historical data has allowed the IRS to focus on particular plan types and market segments.

The information in the report is consistent with our observation of increasing audits of clients' retirement plans. With over 867,000 retirement plans currently in existence, this announcement serves as a warning to many employers that now is the time to re-examine current retirement plans to ensure compliance with the Internal Revenue Code in order to avoid a potentially inconvenient or costly examination or audit by the IRS. While its primary goal is compliance, the IRS can assess penalties, taxes and interest charges, or disqualify a plan from tax exempt status if major violations are not corrected.