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New IRS Examination Rules Tighten IDR Process

A new IRS memorandum to examiners in the IRS Tax Exempt and Government Entities (TE/GE) division sets forth a new process for handling Information Document Requests (IDRs) in retirement plan audits. The memorandum from TE/GE Commissioner Sunita Lough is dated Nov. 21.

The new rules center on the timing IDRs, says attorney Robert Toth, which he notes are central to an IRS audit. In a post on the Business of Benefits blog, Toth writes that “an IRS examination of an employer’s plan has always been a bit unnerving for the plan sponsor” but that the IRS often was gracious when its examiners thought the plan sponsor was acting in good faith. But that, Toth says, “is all suddenly changing.”

Toth says that the examination process had been “relatively fluid,” with response dates and deadlines often negotiated depending on the plan’s circumstances and the parties’ schedules. Now, however, deadlines will be triggered immediately with the first audit notification letter, which will be followed up with a telephone call. “This will be an interesting call,” says Toth, because “most plan sponsors won’t have a clue as to whether the items on the IDR are relevant to the issues on the exam” and that sponsors may agree to a response date because they are intimidated.

Toth notes that the rules, and time window, for extensions now are much tighter as well — as are the consequences of not providing information on time after extensions are granted. “These new procedures appear to be aimed at instilling more discipline into the examination process,” he writes.

In fact, the tougher rules may be too inflexible, Toth suggests, noting that the problem with many such changes to procedures “is that as good as they may appear to the designer on paper they often leave little room for the actual business experience.”

Toth says that plan sponsors may not be alone in finding the rules unwelcome — IRS examiners may as well. “Discretion and flexibility in the process is necessary, to both reward and to impose accountability,” he argues.

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