How to Handle an Audit


Whether your organization has taken preventative measures or not, audits are always a possibility.

What steps should you take when the IRS contacts your organization?

When the IRS notifies an employer that they are the subject of a retirement plan audit, there are five steps the employer should take immediately.

  1. Inform heads of payroll, human resources and any other relevant department(s) of the audit.
  2. Contact your organization’s legal counsel as they will be a vital part of the process.
  3. Contact all the retirement plan’s vendors/service providers and/or record-keepers, such as GuideStone®.
  4. Decide who will serve as the single, consistent point of contact when communicating with the IRS.
  5. Begin gathering and organizing the information needed.
What retirement plan records should I have available?

As an employer sponsoring a retirement plan, you are required by law to keep your books and records available for review by the IRS. Having these records will also facilitate answering questions when determining participants’ benefits.

As a plan sponsor, you should maintain the following retirement plan information:

  • A list of all retirement plans sponsored, both qualified and nonqualified
  • Plan documentation, including employment contracts sponsored during the years of examination
  • The basic plan and trust documents
  • Plan adoption and participation agreements
  • Plan and adoption agreement amendments
  • Service agreements
  • Information sharing agreements (if applicable)
  • Payroll records (copies of Form W-2, hours worked, etc.)
  • Enrollment forms
  • Salary Reduction Agreements (Retirement Contribution Agreements from GuideStone)
  • Internal policies and procedures regarding retirement plan operation and administration
  • Minutes from plan administrative and investment committees (if applicable)
  • Copies of past retirement plan nondiscrimination testing reports (if applicable)
  • Retirement plan notices (if applicable, e.g., Effective Opportunity Notices, Automatic Enrollment Notices, etc.)
  • Trust records, including investment statements and income statements
  • Participant records (e.g., census data, account balances, contributions and earnings, loan documents, compensation data, participant statements, participant notices, substantiation for hardship distributions, etc.)
  • Other records specific to your retirement plan

You should keep retirement plan records until the trust or IRA has paid all benefits and enough time has passed that the plan won’t be audited. Retirement plans are designed to be long-term programs for participants to accumulate and receive benefits at retirement. As a result, plan records may cover many years of transactions.

The Internal Revenue Code and Income Tax Regulations, as well as the Employee Retirement Income Security Act of 1974, as amended (ERISA), require plan sponsors to keep records of these transactions because they may become material in administering pension law. Although church plans are not subject to ERISA, GuideStone recommends that you administer and operate these plans in the spirit of ERISA.

You are required to provide complete, accurate records in either paper or electronic format if the IRS requests them during an audit.

Revenue Procedure 98-25 lists the basic requirements for recordkeeping when a taxpayer maintains their records in an automatic data processing system.

Is your plan operating in accordance with its written terms, the Internal Revenue Code and applicable regulations?

Be ready to demonstrate how the retirement plan is being operated in accordance with plan terms.

Be ready to explain the retirement plan’s administrative processes, making sure to emphasize all the internal controls related to the plan, such as how you ensure:

  • Eligible employees are enrolled on time
  • Participants do not exceed contribution limits
  • Employees who work with the plan are kept up-to-date with plan provisions and changes
  • The plan is operated in accordance with its terms through the use of periodic internal audits
  • Contributions are made to the plan on a timely basis
What are the common errors of which your organization should be mindful?

Understanding common errors will help employers better anticipate what the IRS may be reviewing when auditing a retirement plan. It can be helpful for an employer to look for these issues long before being contacted by the IRS. These common errors include:

  • Improper worker classification.
    Workers incorrectly classified as independent contractors may impact all of the retirement plans, including any self-employed plans. This could potentially be devastating to an employer because correction could require provision of benefits on a retroactive basis and assessment of taxes and penalties. Reclassification of workers from independent contractor to employee most often occurs through IRS employment tax examinations.
  • Plan document error(s).
    This usually manifests itself as a result of employers failing to follow the written plan terms. This is a common error that can be easily avoided. It is vital for employers to understand their plan documents and follow the terms as written. One of the most common errors is an employer’s payroll/HR system not matching the plan document requirements.
  • Failure to follow other documents or amendments related to the plan.
    Examples include a supplemental resolution adopted by a board of trustees, plan amendments, and a misunderstanding by the employer of provisions in the written document.
  • Nondiscrimination errors.
    These errors are usually exhibited by issues with universal availability. Employers must not improperly exclude employees who are eligible to make salary deferrals to the plan, even if they are not eligible for employer contributions. If the employer does make this error, it can be very costly to remedy. The employer must make contributions, as well as earnings, to cure the failure for those inadvertently excluded from participation in the retirement plan.
  • Contribution errors.
    These errors frequently include:
  • Using an incorrect definition of compensation when calculating contributions
  • Exceeding various plan and IRS contribution limitations

Other common errors often relate to improper administration of plan loans, hardship distributions and failure to follow transfer and distribution restrictions.

Hopefully, knowing about and monitoring some of these issues ahead of time will help you as an employer in preventing these errors.

What correction options are available during an audit?

The IRS classifies audit failures as either a contract failure involving an individual participant or a plan failure impacting the whole retirement plan. Depending on the severity of the failure found, the IRS will put the employer into either the Self-Correction Program (SCP) or the Audit Closing Agreement Program (Audit CAP).

The IRS allows plan sponsors to self-correct insignificant operational failures while the plan is under exam. Generally, under Audit CAP, the plan sponsor enters into a Closing Agreement with the IRS, makes correction prior to entering into the Closing Agreement, and pays a sanction negotiated with the IRS. If an employer is under Audit CAP, obtaining legal counsel may be helpful in proceeding through the program and understanding whether the IRS’ proposed sanction is reasonable or negotiable.

It is vital for you as the employer to complete all tasks requested by the IRS before the audit can be closed.

What are some tips to lessen the chances of an audit?

Focusing on audit prevention and preparation may save you time and money. Here are some tips:

  • Review the written plan document to ensure consistency with other organizational documents such as employee handbooks, company webpages, procedural manuals, plan summaries, etc.
  • Review retirement plan operational practices and procedures to ensure they match plan terms
  • Run test checks of eligibility, contributions and loans
  • Stay alert when changing payroll systems – ensure eligibility, plan compensation and contribution formulas are correct

Learn more on audit preparation and prevention.

How can GuideStone help?

At GuideStone, we want you to know you do not have to weather the storm entirely on your own. GuideStone can help in lessening the risk of and preparation for an audit by providing information and assisting with mock-auditing tests for the employer for an additional cost. While an audit may be inevitable, proper preparation will always minimize the time and cost.

As always, feel free to contact your relationship manager to access GuideStone’s resources as well as additional information regarding IRS audits.

This information should not be considered tax or legal advice. GuideStone stands ready to assist your organization as you work with your legal and tax advisors by providing resources that you and your advisor may find beneficial.

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