Living Through a DOL or IRS Audit

Many plans go experience it. Most Plan Sponsors dread it. Those three words that cause instant panic: "You're being audited." But it doesn't have to be painful at all.

Here are some things that I have learned in dealing with plan audits on behalf of our clients.

• There are many reasons a plan may be pulled for audit: Random sampling, complaints from participants, "red flag" data on Form 5500 filings to name a few.
• The agents (whether IRS or DOL) are not "out to get you". The last thing they want to do is disqualify a plan, so they will work with you...as long as you work with them.
• The agents are human. Most are easy to deal with. All have lives outside of audits, and all would prefer a easy-going relationship during the process rather than a hostile one.
• If asked for data or information, provide it. Don't try to hide anything or sugar-coat issues. The agent will discover it one way or another, so best to be up front about any issues that may exist on the plan.
• Better yet, if you know of an issue that exists (late 401(k) deposits for example), correct them right away, BEFORE you are pulled for an audit. That way you can show what the issue was, how and when it was corrected, and the back-up. In most cases this will suffice and no further action may be required.
• Keep copies of everything for at least 5 years. Make sure your Third Party Administrator keeps copies even longer.
• Rely on your Third Party Administrator to assist in the audit. Don't try to handle it alone.
• Know that the audit must take place at your place of business. So try to make the agent comfortable and provide him/her with plenty of room to work. If you stick him/her in a supply room (or meat locker -- YES! I have heard of someone trying that once!), you will come off as confrontational and instantly put the agent in the wrong frame of mind.
• In the end, the auditor is there to ensure the plan is operating correctly, and to protect the employees. It is actually and admirable function, but one misunderstood by most...

Now it may sound like I am sticking up for DOL and IRS agents...and in a way I am. In the dealings I have had with them over the years, it has been the rare case when the agent was difficult to work with or unwilling to compromise. The majority have been a pleasure to work with, and have been more than reasonable in their requests and time-frames provided to get the information.

There is the old saying that you can catch more bees with honey...and I believe this is true. An audit can be quick and painless, or it can be a long drawn out process with negative results. You can control which path the audit goes down...