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IRS Confirms Review of Changes to VCP Enforcement, Audit Process

Regulatory Agencies

The details of a shift in process review by the IRS first reported by the American Retirement Association were “the elephant in the room” at a Joint TE/GE Council Employee Plans & Exempt Organizations meeting on Friday.

Following the usual outline of accomplishments for the past year, Tammy Ripperda, Commissioner, Tax Exempt and Government Entities Division, IRS, proceeded to address “the elephant in the room,” concerns shared by an IRS whistleblower with the American Retirement Association and later confirmed independently regarding a shift in emphasis with regard to review of issues submitted for remedy under the current Voluntary Correction Program (VCP). 

Ripperda emphatically stated that no changes have been made to the VCP program. She acknowledged that, as part of their ongoing internal training efforts, however, the IRS found that procedures outlined in the Internal Revenue Manual and in the EPCRS Revenue Procedure (Rev. Proc. 2019-19) have not been adhered to by the IRS. Thus, although the technical aspects of the program have not changed, the enforcement of the existing rules is under scrutiny. Said another way, the shift being considered—and it apparently is under consideration—in the long-standing process with the VCP is apparently seen by the IRS not as a change in official practice, but rather an adherence to the black letter of the stated procedures. 

‘Cliff’ Notes

The article cited two situations where a VCP submission might be referred to examinations. First is failure to timely respond to requests from the IRS within 21 days. IRS representatives at the meeting confirmed that this is not meant to be a cliff. However, they noted that there were some 30 filings where the process was viewed as unnecessarily delayed due to the VCP applicant’s unresponsiveness. While existing IRS procedures provide for the referral of these situations to examinations, this historically has not happened. The IRS now wants agents to follow these procedures. 

Similarly, if a taxpayer withdraws a VCP application because the taxpayer and IRS cannot agree on a correction method, existing procedures provide that the case may be referred to examinations. As stated by Commissioner Ripperda, “it would be indefensible to allow bad plans to go without consequence.” Concerns were raised on whether this policy would negatively affect IRS agents from negotiating settlements. The response from the IRS is that there are checks and balances in this process. 

In particular, a taxpayer/plan administrator, as part of the VCP process, can request to have a manager review the case. If there ultimately is a failure to reach an agreement, then the case would be referred to examinations. While there is an independent process to determine whether a referred case will actually be examined, it is very likely referrals from VCP submissions will be examined. Most referrals to the examinations area must be independently reviewed to determine if there is an issue warranting an examination. Referrals through the VCP, however, already have the disqualifying defects—which are identified by the applicant. 

‘Nerve’ Wracking

It’s clear the article—and the shift in practice it described—struck a nerve with both practitioners and the IRS. Practitioners emphasized the need to have some comfort that a submission under VCP will not increase the chances of a plan audit. It was pointed out that EPCRS was based on cooperation and trust between the IRS and the benefits community. Commissioner Ripperda stated that there has not been a change at the IRS that warrants the concerns being raised, though it was clear that the changes considered—and being considered without prior discussion or consultation with the benefits community—raised concerns that trust is deteriorating. 

Reactions from attendees varied. It’s clearly something that practitioners must now take into account when advising a client to submit a plan under VCP. It’s also likely to trigger more anonymous VCP submissions. There was no discussion on whether the current anonymous submission program might change, though that would require a formal modification of the Rev. Proc. Nevertheless, a change in enforcement policy such as that being contemplated by the IRS may put this on the table. At the very least, the current and long-standing VCP process is largely tied to the reasonable separation of these applications from being submitted for examinations—and it’s no longer certain exactly how separate those procedures will be going forward.

 We will, of course, be monitoring this situation and will follow up should new developments arise. 

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