IRA Compliance — Are You Prepared for an IRS Audit?
Compliance is a critical concern for financial organizations that serve as IRA trustees, custodians, and issuers—and for good reason. IRS penalties for noncompliance and violation of IRA rules can be costly. If the IRS finds compliance issues with your IRA program, it could lead to further scrutiny of your organization.
Even those who are confident in their compliance procedures can find themselves tripped up by an IRS audit.
Fortunately, our Ascensus experts know a thing or two about how to survive an IRS audit. As an ERISA consultant, Carrie Horn has been conducting onsite compliance assessments for 25 years. During a compliance assessment, Carrie looks at everything that the IRS would review during an audit.
Carrie sat down with us to talk about her compliance assessment experience and to offer insight on what financial organizations can do so they aren’t caught off guard during an audit.
Let’s face it, the last thing you want to hear is, “We’re being audited.”
If IRS agents end up on our doorstep, what will they examine during an audit?
There are three general areas of IRA compliance: documents, withholding, and reporting. IRS agents will review your paperwork associated with most required procedures, and they may interview your staff about these procedures. They might look at anything related to your IRA, HSA, Coverdell ESA, or qualified retirement plan programs.
Are there weaknesses that you can identify and are particularly concerned about? It’s important to search for and correct any areas of weakness before an IRS audit. An Ascensus onsite compliance assessment is an excellent way to do this.
What can we expect during a compliance assessment?
First, an Ascensus consultant will send you a pre-assessment questionnaire to gather information about your organization. We’ll want to know what types of accounts you are responsible for. When I begin an onsite assessment, I’ll meet with your staff and ask questions about your procedures. I’ll ask you to take me through the steps of opening an IRA or correcting a transaction, for example. Then I’ll select a random sampling of your clients and review those files: from the earliest to the most recent transactions. After I have completed my assessment, I’ll meet with your staff again in an exit meeting to discuss any concerns that I may have. Approximately one month after the review, we’ll provide your organization with a comprehensive report that outlines any compliance issues and recommendations from Ascensus on how to address those issues.
What’s the most common compliance problem that you discover?
Meeting withholding requirements can cause problems for even the most compliant IRA programs. Some common withholding errors occur when a financial organization does not retain the evidence that it provided IRA owners with a withholding notice at the time of an IRA distribution. Other withholding compliance issues that we frequently find occur when organizations do not withhold according to the IRA owner’s election, or if a signed election wasn’t made, when they fail to withhold the default withholding rate.
Other common compliance errors include the lack of documentation or incorrectly completed tax reporting forms. If an IRA owner’s Form 5498 or Form 1099-R are found incomplete or don’t match the documentation in the file, it’s a sign that there may be compliance errors.
How can we prepare for an IRS audit?
The key to a positive outcome is to keep up with IRS rules and regulations. Your IRA administrators should understand the requirements and effectively convey those rules and proper procedures to your staff who handle IRAs. This could mean creating and frequently updating a well-kept procedural manual and attending training sessions.
Your files should be complete and well organized, whether they are in paper or electronic form. It’s important that the required documents are signed and can be easily found when needed. This includes files that you’ve retained for past required IRA amendments that were sent to IRA owners.
We recommend a compliance assessment at least every two years. An IRS audit can be a scary prospect, but the more prepared you are for a compliance review, the better prepared you are for when the IRS shows up at your door.
