EPCRS and SCP

[Belgarath]

I've always found the following requirement somewhat scary, as it is subjective on the part of the IRS:

An explanation of how the failure occurred and a demonstration of the existence at the time of practices and procedures reasonably designed to promote and facilitate overall compliance.

Obviously, even if you have great procedures, mistakes can happen, which is one reason that EPCRS exists. I'm curious if anyone has ever had a plan audited, where SCP was used, and the IRS disallowed the SCP due to a perceived defect in such "reasonable" procedures?

[Peter Gulia]

I suspect there might be few instances in which the IRS found an error not corrected because the plan’s administrator lacked adequate compliance procedures to make the situation eligible for self-correction. But that might result not because IRS people think the procedures are good enough, but because the IRS examines so few plans, and even those ordinarily only for a few years.

Yet, I confess my limited experience; let’s look for what BenefitsLink neighbors say.

[Towanda]

I have found the IRS to be very reasonable in a plan audit.  I am currently finishing up an audit where I found a few errors in reviewing the 2020 plan year prior to submitting requested documentation to the IRS.  

I called the auditor and explained that I had identified two errors.  I would send him a narrative for each and include my recommendations for correction following EPCRS principles.  I also said I wouldn't take any action until he had reviewed everything and was in agreement, but I wanted to bring them to his attention in advance.  Bearing in mind the corrections would be completed under Audit CAP, I felt a show of competence and some advanced heavy lifting was in order. 

I've had conversations about the plan of action with the agent since, and he has been very accommodating.  We haven't gotten final word yet, but I'm hopeful the sanctions will be minimal . . . or perhaps there will be no sanctions at all.  Believe it or not, that's a genuine possibility.  

This is a small dental practice.  I coached the dentist in advance on how to respond to the agent in his formal interview, including being prepared to discuss procedures, and to be responsive but not to overshare. 

I have managed numbers of retirement plan audits over the years, and have always found the IRS to be reasonable and pleasant to work with.  I would like to think my experience is not unique.  

The DOL . . . that's a different story.  I went through a gigantic DOL audit last year and the agent was hell to work with . . . she was wrapped head to toe in red tape to the point of being absurd.  At the tail end of the audit I lost my cool with her - groan - but everything had been fixed to the penny by that time.  She was splitting hairs over semantics so she could submit the final file to the DC office.  As an example, she said there is a big difference between a "withdrawal" and a "distribution" . . . seriously??? . . . ultimately, I had to change the wording on nearly every document I prepared for one silly reason or another. 

More to your question though, if an error that was self-corrected happens to be part of the plan year under audit, we have EPCRS to fall back on.  In any self-correction we save everything we've done so that in the event of an audit, we have a leg to stand on.  And that is precisely what I tell my clients when they whine about the cost and effort involved in a plan self-correction.  As TPAs/consultants, we're called to do this to protect our clients' retirement plan qualification.  So, if an IRS agent rejects an item that was corrected under SCP, it's not subjective.  There is a genuine problem with how the correction was handled, or there is a lack of corresponding documentation.

If an error happened because of a complete lack of procedure, generally the client learns that a procedure is required, and part of the correction process includes coming up with a procedure that will prevent the same error(s) from happening again.  And that's what the IRS wants to see - contrition, cooperation, a solution and an improved procedure. 

[AKowalski]

I haven't seen or heard of it happening, but my guess is that the IRS would only invoke that provision to deny an otherwise-EPRCS-sanctioned self-correction in rather extreme cases.

Two categories come to mind: (1) intentional schemes by people who are obviously trying to game the tax code with plans that clearly violate at least the spirit of the law; or perhaps the overall plan is in good faith, but the taxpayer appears to have intentionally committed the specific error in question and was counting on the validity of the EPCRS-sanctioned self-correction to further an abusive tax scheme (the IRS deals with people like this all the time; I would be shocked if there aren't examples in this category where the IRS has thrown the book at the taxpayer, so to speak), and (2) plans that may not have intentional compliance failures, but where fundamental negligence is apparent (e.g., a plan that is being operated without a plan document, a plan whose assets are being intermingled with employer assets or being used as a piggy bank/source of loans by the CEO; plans (especially large or midsize plans) that lack a fiduciary committee, where the board is nominally the fiduciary, but in reality it is being run on a day-to-day basis by people who do not have any formal grant of fiduciary duty, who are not operating the plan consistently, and who are not regularly identifying and correcting plan errors). 

I doubt the IRS will invoke that provision in the case of a plan that is appears to be operated in good faith, with a fiduciary committee that meets regularly and addresses a variety of potential compliance questions at each meeting, that generates substantive minutes and has periodic discussions with ERISA counsel that routinely result in self-corrections when errors are identified. 

As part of a VCP submission, you have to include a statement about how you are fixing your procedures to avoid similar errors occurring going forward. As a rule of thumb, I think it is prudent to save everything you would have submitted as a VCP submission in a self-correction file, including a narrative description of the failure, how it occurred despite your reasonable procedures, and a description of how diligent you were in fixing the problem and correcting your procedures once you discovered the failure.