Is Your IRA Program Ready for an IRS Audit?
By Jodie Norquist, CIP, CHSP
Maintaining a compliant IRA program can feel like a moving target for many financial organizations. Even if you feel confident in the checks and balances built into your daily IRA operations, mistakes happen. These errors can become costly, especially if the IRS comes calling with an audit.
Ascensus’ ERISA consultants travel around the country to conduct onsite compliance reviews of IRA programs, helping financial organizations reduce the potential for errors. During these compliance assessments, they will review everything that the IRS would review during an audit, including all opening documents, amendments, reporting, and correspondence. They’ll examine your procedures and identify any areas of concern that may require changes or corrections before an IRS audit.
Stacy Torkelson, an ERISA Consultant at Ascensus, says many failures she discovers while out in the field involve errors made within all aspects of meeting federal withholding requirements. Withholding rules can be challenging to follow and IRS penalties can be high if you don’t. Failing to provide an IRA owner with the required withholding notice, for example, can involve a $100 penalty per failure, or up to a maximum of $50,000 per calendar year.
Plan Now for Future Compliance Requirements
Even if you aren’t too concerned about whether your current procedures will hold up to scrutiny during an IRS audit, Stacy says that IRA administrators should brace now for upcoming regulatory changes that directly affect IRA operations. These new rules may require additional time to be set aside to maintain compliance. For example, the IRS will require financial organizations to amend their IRA documents for the SECURE Act, the detailed guidance for which is expected soon. This will require financial organizations to send amended IRA plan agreement and disclosure statements to each IRA owner.
“Think about the number of hours that it takes to complete an amendment process.” Stacy explained. “If you’re busy with other projects, you need to start thinking about allocating extra hours to complete everything on time.”
Other changes that could be coming in the months ahead include
release of the final required minimum distribution (RMD) regulations (the IRS issued proposed regulations in February 2022); and
Possible enactment of the Securing a Strong Retirement Act of 2022, often referred to as SECURE 2.0, which was passed by the House of Representatives in March 2022 and awaits Senate consideration.
In addition to the items mentioned above, a new withholding form will be required for IRA and employer plan nonperiodic distributions beginning on January 1, 2023.
Preparing for the Compliance Review Process
Tammy Schultz, an ERISA Consultant at Ascensus, says that many financial organizations had stopped requesting compliance reviews during the coronavirus pandemic, primarily because their offices were closed and employees were working from home. Now that many offices have reopened on a part-time or full-time basis, requests for compliance reviews have been steadily increasing.
An onsite compliance review may take a few days or longer, depending on the size of the organization. The process begins with a pre-assessment questionnaire by phone to gather information on the organization. While on site, a consultant will need computer access to files, certain documents printed ahead of time, and a designated staff member when help is needed.
“The more prepared they are for us, the better the audit experience is going to be,” Tammy explained.
An ERISA consultant will also meet with staff and ask detailed questions about the organization’s procedures. A random sampling of client files will be reviewed, and each transaction will be checked to make sure it was done correctly. The consultant will then conduct an exit meeting to discuss any issues of concern found during the compliance review. The financial organization will also receive a comprehensive document that identifies those issues and the recommendations to correct them. A compliance assessment audit is recommended at least every two years.
ERISA consultants and IRS auditors may ask about the following issues.
Reporting
Are the correct distribution codes being used, especially during complex transactions, such as excess contribution removals?
Has the net income attributable (NIA) for an excess contribution removal or recharacterization been calculated correctly, or at all?
Are there notes in the file to explain why certain transactions were performed or corrected?
Withholding
Did you timely provide IRA owners with their required withholding notices?
Did you retain the records that show you correctly reported withholding?
Do you have the proper language to fulfill your withholding notice requirements?
Plan Documents
Do you have proof that each IRA owner was provided with a plan agreement, disclosure statement, and financial disclosure when they opened an IRA?
Were amendments timely sent when required?
If documents have been updated or amended, is your staff using the most current versions?
If you haven’t already, take a moment now to see if any of these situations could be an issue at your organization. Addressing these situations now may help your organization avoid IRS penalties, and at the same maintain good customer relations through IRA administration excellence.
