Surviving an ESOP Audit

Transcription

1 Surviving an ESOP Audit John Stone, CPC FD BPS&M Consultant, Defined Contribution James B. Bristol, Esq. Partner Waller Lansden Dortch & Davis, LLP M. Sean Sullivan, Esq. Partner Waller Lansden Dortch & Davis, LLP

2 Agenda Background Exam Focus Preparing for an Audit Resolution Best Practices 2

3 Background The IRS Audits Enforces compliance with tax code Can impose taxes, penalties, interest The DOL Investigates Guards against fiduciary breaches Enforcement comes from litigation 3

4 Mount Sinai 1446 B.C. 4

5 Background DOL Fun Facts Fiscal year ended September 2012: 300 investigators closed 3,566 cases 72% had monetary recovery totaling $1.27B Indictment of 117 individuals About one-third arose from participant complaints 5

6 Background DOL / IRS Process: 3. Follow up 2. On site visit -Document Review -Interviews 1. Initial contact 6

7 DOL Exam Emphasis Stock valuation Evaluation of appraisal Potential conflicts of interest for trustee Recent transactions Leveraged transactions Financing / refinancing S Corporation ESOPs Release of shares Fidelity bonding 7

8 DOL Exam Emphasis Compliance with plan documents Distribution rules Fiduciary duties and training Plan investments Plan expenses Policies and procedures Minutes of committee meetings Reporting and Disclosure 8

9 IRS Unofficial Motto We have What it takes, to take what you have. -Anonymous 9

10 IRS Audit Emphasis Plan Qualification Issues Compliance with plan document Compliance with regulations Eligibility Vesting Distributions Tax Considerations Employer deductions Timing of contributions Trust income Nondiscrimination Testing Monitoring combined plans limits Anti-abuse testing applicable to S- corporations 10

11 How to Prepare for an Audit Requested information Organize Have audit folder ready Best Practices Be prepared to hurry up and wait Don t panic Come down off the ledge (it s not the end of the world) Policies & Procedures Know your plan Communication Key to a successful audit 11

12 How to Prepare for an Audit (cont.) Audit the plan yourself If you discover problems, have correction strategy in place before audit begins If agent will be on-site, decide if want legal counsel present 12

13 During the Audit Be courteous to the agent Provide only the information requested Control the communication process Provide answers in writing where possible Limit the people who can be interviewed and prepare them to answer questions precisely Consult with legal counsel during all stages, especially before signing tolling agreement 13

14 Resolution DOL Investigation No action letter All is well There may be ERISA violations No action being pursued Voluntary Compliance Letter There have been ERISA violations Corrective action is required Litigation IRS Audit No change (close as filed) Errors found Plan must be made whole Corrective contribution plus interest and penalty Voluntary correction not available upon audit 4975 Excise Tax Plan disqualification (rare) IRS Appeals Process 14

15 Best Practices Know your plans Talk with your advisors Understand your fiduciary responsibilities Keep all records in one place Executed plan documents Committee minutes Policies and procedures 15

16 Best Practices Make sure annual plan administration report addresses various compliance tests Proactively perform self-audits Use correction programs to fix problems Be responsive to participant questions Address DOL / IRS inquiries timely 16

17 Self-Audits Plan document Know your plan document Proof of timely adoption (restatements / amendments) Determination letters Plan qualification Operated in accordance with plan provisions Document plan interpretations Nondiscrimination testing (combined plan basis) 17

18 Self-Audits Plan assets Stock valuation (trustee s approval) Timing of contributions Plan expenses Tax issues Timely completion and filing Forms 5500, 1099-R, 945, etc. Reporting requirements Participant disclosures Account balance, safe-harbor notices, diversification, etc. 18

19 How to Correct Issues You Find DOL Correction Programs Delinquent Filer Voluntary Correction Program Voluntary Fiduciary Correction Program IRS Correction Program EPCRS Self Correction Program Voluntary Correction Program Audit Closing Agreement Program 19

20 Questions We'll try to cooperate fully with the IRS, because, as citizens, we feel a strong patriotic duty not to go to jail. - Dave Barry 20