Surviving an IRS Audit – Tips From an Expert

 Tammy Schultz, CISP, CHSP, QPA

 Tammy Schultz, CISP, CHSP, QPA

“We’re being audited!”

This is something that no financial organization wants to hear. During an audit, chances are pretty high that the IRS will penalize a financial organization for something that it’s doing incorrectly. Even organizations that do everything they can to stay in compliance may be caught off guard during an audit. Luckily, there are experts like Tammy Schultz, an Ascensus ERISA consultant, who know a thing or two about surviving (and potentially avoiding) an IRS audit. 

Tammy has been conducting onsite compliance assessments for more than 15 years. These assessments are designed to help financial organizations prepare for a potential IRS audit. During a compliance assessment, Tammy reviews everything that the IRS would review during an audit. Tammy recently discussed her experiences in conducting compliance assessments for financial organizations. Here’s what she had to say.

What does a review process look like? 

We start with a pre-assessment questionnaire that gathers information on the organization and the type of IRAs and retirement plans it maintains. At the beginning of the onsite assessment, I’ll meet with the staff  and ask detailed questions about their procedures. I’ll then select a random sampling of clients and review the files from start to finish. At the end of the review, I’ll conduct an exit meeting to discuss some of the more concerning issues that were found during the assessment. Following the assessment, I’ll provide the organization with a comprehensive document that outlines the organization’s compliance issues and Ascensus’ recommendations for correcting those issues. 

What documents do you examine during the review process?

Everything! When I go through a file, I review every document that I find. I look at all of the opening documents, amendments, reporting, and correspondence. Even if the document isn’t required, I’ll review it to see how and why the transaction was done and whether it was done correctly. 

What’s the most common compliance issue that you have come across?

The withholding requirements. For example, the withholding rules state that a withholding election is valid until it is revoked. But most organizations treat the withholding election as if it belongs to the transaction and not to the IRA or retirement plan. Let’s say, for example, that an IRA owner establishes scheduled payments and elects to waive withholding. Later in the year, the IRA owner requests a distribution that is not part of the scheduled payments. The IRA owner elects to withhold 10 percent, which changes the withholding election for all future payments to 10 percent. If the organization fails to apply the new withholding election to future distributions, the organization could be subject to IRS penalties, including being liable for the amount that should have been withheld but wasn’t.  

Have any of your clients been penalized by the IRS? If so, what was the penalty for and how much was it?

To try to avoid IRS penalties, most clients take a more proactive approach and have us in before they’re audited by the IRS. But the most common penalty that I hear about is for incorrect reporting. For instance, the organization receives IRS Notice 972CG (Notice of Proposed Civil Penalty) indicating a $50 penalty for failing to file Form 5498. Incorrect reporting is something that the IRS is more aware of because it receives the reporting and knows when it is incorrect.  

Have you come across an easily preventable compliance issue?

Yes. During the review of an organization’s IRS reporting forms, I noticed that all of the Forms 1099-R that had already been sent to the IRS were not properly completed. We determined that during a systems change, the correct amounts were not brought over to the new system. As a result, the financial organization had to correct and send out approximately 500 forms to its clients and the IRS. The organization could have avoided this issue by doing a quick check of the 1099-R report before sending the forms to the IRS.

What are the two most important steps that financial organizations can take to prepare for an IRS audit?

Financial organizations should always keep up with IRS rules and regulations. Once they understand what they’re required to do, those rules need to be relayed to the staff members who work with IRAs and retirement plans. This may require maintaining a procedural manual and attending training sessions. 

Another method of staying in compliance is to have well organized files, whether it’s paper or electronic. Make sure that the required documents are signed and can be found when needed or requested. This also includes retaining amendments that have been required throughout the years. 


Tips from Tammy

Your financial organization has its own strengths and weaknesses. The key to surviving an IRS audit is to identify and correct any areas of weakness before the IRS does. An onsite compliance assessment is an excellent way to do this.

Contact your Ascensus sales representative for more information on our onsite compliance assessments. Remember—Ascensus is here to help.

Bryan Loomis