In an internal memorandum dated November 21, 2016, the IRS set forth new procedures that its examiners must follow when conducting audits of, among other entities, employee benefit plans. Specifically, the new procedures apply to IRS Information Document Requests (“IDRs”). IDRs are used to notify taxpayers about items (e.g., plan documents and payroll records) that the IRS will review in connection with an audit.
Highlights of this IRS memorandum are as follows:
- The IRS examiner will mail an initial contact letter to notify a taxpayer and/or its representative when a return (e.g., Form 5500) is selected for examination. After ten business days have elapsed, the examiner can initiate contact with the taxpayer and/or representative via telephone to discuss the issue(s) being examined and the items the examiner plans to request.
- After a response deadline has been set, the examiner will send the IDR to the taxpayer. In this connection, the “examiner will use clear and concise language” when drafting IDRs.
- If the taxpayer does not respond to the IDR, or if the response is not complete, then the examiner must determine within five business days if an extension will be granted. However, no more than two extensions can be granted. Note that this reflects a more stringent process than before, as examiners have traditionally had discretion in setting even several deadlines and extensions.
- If the taxpayer does not provide a complete IDR response to the examiner after the second extension (if a second extension is even granted), the examiner will begin the “Enforcement Process” (e.g., issuing a delinquency notice and, if necessary, thereafter issuing a summons).
Also on November 21, 2016, the IRS issued an internal memorandum that identified aspects of the IDR process that are not mandatory, but are considered “best practices” to make the process more effective.
In the event of an IRS plan audit, the plan sponsor should familiarize itself with these memoranda and consult with experienced legal counsel for assistance with the IRS’s initial phone call, as well as with responding to all IDRs. Please let me know if you or any of your clients would like to discuss my experience in this regard.
Here is a link to these IRS memoranda: https://www.irs.gov/pub/foia/ig/spder/tege-04-1116-0028.pdf