Incompetent IRS Auditor Upsets Client

[Guest deathbycashcall]

We recently had yet another one of our clients audited by the IRS. Seems to be a lot of audit activity in the Southeast area lately. Fortunately, the plan was a nice, clean Safe Harbor Match 401(k) plan with no potential issues that we were aware of. It was a very small plan with less than 15 participants with very good participation.

The auditor insisted on handling the audit at the workplace so our involvement was somewhat limited. After nit-picking some irrelevant issues related to the 1120, he took issue with 2 things. (1) He noted $245 in the forfeiture account at year-end. He stated that such accounts are not permitted by the IRS and should never be established or maintained. The forfeiture was generated by old PSP monies subject to a vesting schedule. Although the document clearly stated that forfeitures would be used to reduce matching contributions, the forfeiture was in fact "swept" in the first month following the plan year end when the safe harbor match was funded, the auditor was not satisfied and considers the issue "open". I don't know how any plan in the country that has a vesting schedule could possibly operate without a temporary holding account for forfeitures.

(2) And this is even more ridiculous......the plan was top heavy, solely safe harbor, and there was one participant who did not defer and therefore did not benefit. Auditor continues to claim that this participant should receive a top heavy minimum even after being referred to the EGTRRA amendment. Even if the auditor wasn't quite "up to speed" with EGTRRA, you would think he would have required top heavy minimums for all since prior to EGTRRA, matching contributions could not be used to satisfy top heavy. And, the icing on the cake, and what makes this whole thing really pathetic is that his BOSS from the regional office was present for the audit!

All in all, my client and his assistant lost 3.5 days of valuable business time and were left with a very bad taste in their mouth. They don't know who to believe, me or the auditor. His general feeling was that it didn't appear that the IRS wanted him to have a plan at all. I am left with having to address these 2 issues again, and doing so somehow without insulting the auditor for his obvious inexperience and incompetence.

Just thought I might share this experience with others.

[SoCalActuary]

Usually, the supervisor is chosen (not for technical ability but) for supervisory ability.

You have every right to kick this up in the IRS hierarchy to get technical advice.

In addition, you are stuck with wasting your time doing the IRS' training for them on the job. However, if you are certain of your position, gently encourage the agent and supervisor to get more training to understand your position. You will probably encourter the agent again in the future.

[Bird]

There, now, does that feel better?

Seriously, sounds like a bad combination of factors. I had heard that they were insisting on having audits at the clients' places of business, but haven't had been forced into that situation yet. We've had success with telling them they're more than welcome to visit the client's office, but that we have all of the important records and that it would be impractical to hold the audit anywhere but at our place. So far so good. (Not implying you did anything wrong, just sharing.)

[Guest PatF]

Sounds like a letter should go to your clients congressmen stating the fact that the IRS is making it difficult for him to provide benefits to his employees and could he get help in resolving the matter.

The auditors are supposed to be looking for the law benders or fraud etc, not to make it difficult on the employer that is following all of the guidelines.

P

[Kirk Maldonado]

I think that you should go up the chain in the IRS before contacting the Congressman for several reasons. First, it might not be necessary to get him involved, because you may prevail on appeal. Second, I'm sure that the Congressman's office doesn't want to get involved in every IRS audit, and they may be afraid that all taxpayers think that they are being abused in audits. Third, if it fails, you may have really alienated the auditor, which is probably the last thing you want to do.

[Lame Duck]

Sometimes, pursuing the issue up the chain of command can have hidden blessings. Back in the good old days when I still submitted plans for determination letters, I had a new IRS reviewer who refused to issue a DL because my plan was using a 500 HoS requirement. she insisted that the minimum permitted under the law is 1,000 hours of service, basing this argument on the fact that the heading for 410(a)(1) is minimum age and service conditions . I finally got tired of trying to teach her the law, and asked to speak to her supervisor. The supervisor was very hostile when she came on the line until I explained why the reviewer was an idiot. She issued the DL immediately.

The upshot is that I had another plan assigned to this same reviewer a few months later. She was questioning some of the provisons in the plan and one of my staff said she would have to speak to me, giving my name. The reviewer's response to that was, "plan is qualified" and issued the DL. I had traumatized her so badly the first time, she would approve anything rather than have to deal with me again.

[mbozek]

Instead of getting aggrevated why not exercise your rights and ask the agent to provide you with a statement in writing justifying the agent's position with references to the IRC and regs? The agent will not issue a letter without having it reviewed by an IRS attorney.

[FJR]

Maybe under the assumption that the little $245 forfeiture would kick in a required TH minimum?

[austin3515]

Really great point (i.e., because this would blow the Plan's TH exemption), but the doc says that forf's offset the match, so that shouldn't be it...

[FJR]

Austin, one would hope that the document says that. The post indicated that it was generated from an old PS account. I have taken over plans where it refers to match forf. as reducing contribution, not PS.

[austin3515]

I bet deathbycashcall is pouring over her document as we speak...

[Kirk Maldonado]

Lame Duck:

You were fortunate, but I could imagine the reviewer taking the opposite approach, reading your plan with a fine tooth comb, trying to find any little problem that he or she could. However, even if the reviewer does go through your plan in excruciating detail, it is almost guaranteed that he or she won't ask for any changes without making sure that they are really required.

[Appleby]

Kirk,

Do you sleep?

[Kirk Maldonado]

Usually only on odd days.