Member of Russell Bedford International, a global network of independent professional service firms.
Member of Russell Bedford International, a global network of independent professional service firms.
In November of 2015, sponsors of audited employee benefit plans received a letter from the Department of Labor notifying them that over 40% of all audits submitted were not completed in accordance with auditing standards. Why is this concerning? Because audits that are not correctly performed create many issues for all those involved with employee benefit plans, including the plan sponsors, fiduciaries and participants.
Annual audits are an ERISA (Employee Retirement Income Security Act of 1974) requirement for plans with participants over a certain threshold and are attached to Form 5500. An audit verifies the assets of the plan and confirms the plan is operating according to the plan documents and in compliance with applicable laws and regulations. These audits have a filing deadline of October 15 each year.
Errors in plan administration can trigger issues with the IRS, including penalties, and can also cause legal problems for the plan’s fiduciary. More importantly, audits that are correctly done can detect a number of errors that, if not caught early, turn into major problems. Commonly seen errors include: incorrectly calculated employee deferrals, employer matches, and deferrals for unique forms of compensation (like commissions or bonuses). Other common issues that may be uncovered with an audit include:
The November Department of Labor letter communicates the results of the DOL’s audit of plan auditors. The intent of the letter was to encourage plan sponsors to confirm that they are using qualified, experienced auditors. Plan administrators are held responsible as fiduciaries of the plan, and can be held personally liable if they are not making reasonable choices with regard to their plan. This includes due diligence with selection of their plan’s auditor.
While many accounting firms are choosing not to continue to offer employee benefit plan audits as a service, Cray Kaiser assures clients that we are uniquely qualified for this work. In addition to our commitment to quality and continued education in this area, our staff has a great deal of experience understanding the nuances of these audits. Cray Kaiser is also a member of the American Institute of Certified Public Accountants’ EBPAQC (Employee Benefit Plan Audit Quality Center), a group created to improve quality of benefit plan audits with news alerts, training, webinars, audit quality center and other resources.
There’s nothing good about being selected for an IRS audit. At best it’s a time consuming nuisance, and at worst you’ll be poorer in the end. But you can reduce your likelihood of being audited, or if you are selected, of being billed.
There are three types of IRS audits. The simplest and most common is a correspondence audit, where the IRS mails you a request for further information about one or more items on your return. In most cases the issues can be resolved by responding with the appropriate documentation.
If you’re selected for an office audit, the IRS will schedule an appointment for you to meet with an auditor at their local facility. They’ll tell you in advance which specific areas of your return(s) will be addressed and what types of documentation you should bring in.
A field audit is more comprehensive. An IRS agent will travel to your home, business, or representative’s office, review the returns at issue, request documentation for questioned items, and ultimately issue a report either recommending a tax change or accepting the returns as filed.
Correspondence audits are often triggered by information matching. The IRS receives W-2s, 1099s, and similar reports from businesses and financial institutions and matches the numbers to the tax returns filed by the individuals involved. If the returns don’t agree with reported figures, the individual will be asked for an explanation and/or simply mailed a bill.
The IRS also uses a computer scoring system to select audits. Based on past experience, the system assigns a score to each tax return indicating the likelihood that the tax was understated or certain income was not reported. Common red flags include the following:
In 2015, above-average audit activity may be expected for upper income individuals, sole business proprietors, partnerships, and S corporations. Cash-intensive enterprises (bars, restaurants, taxis, hair salons, etc.) are particularly apt to receive a higher rate of scrutiny, as are industry categories that tend to have high rates of deductions not independently reported to the IRS (such as construction and real estate rental businesses).
If you do happen to be selected for an audit, call us. We’re prepared to assist you with whatever is needed.
*This newsletter is issued quarterly to provide you with an informative summary of current business, financial, and tax planning news and opportunities. Do not apply this general information to your specific situation without additional details and/or professional assistance.
