Since the introduction of electronic filing in 2009, the IRS and DOL have been more aggressive in using the Form 5500 and schedules to identify plans for audits and investigations. Last year, for example, within a few months of the Form 5500 filing, the DOL sent thousands of letters or emails to plan sponsors requesting amendments or explanations of responses on the form or schedules.
But what responses are likely to trigger an audit or investigation? While neither the DOL nor the IRS releases an official list of such responses, statements made by IRS and DOL officials usually give us a pretty good idea. For example, a recent technical update from SunGard Relius references a recent ASPPA/IRS conference where are IRS official identified four situations that are likely to raise eyebrows:
• line items that are left blank when the instructions require an answer
• inconsistencies in the data disclosed on the Form 5500 schedules
• a large drop in the number of participants from one year to the next
• a large dollar amount in the “Other" asset line on the Schedule H
Other red flags include hard-to-value investments, non-marketable investments, and consistent late deposits of deferrals.
The moral of the story: Plan sponsors and practitioners should be cognizant that the Form 5500 does have enforcement significance — like the 1040 form — and is not just for gathering information. Furthermore, practitioners should be aware of how certain actions and investments will be reflected on the Form 5500 and schedules, and should alert their clients about how they may increase the possibility of an IRS audit or a DOL investigation.
