The basic techniques incorporated in this manual are intended to ensure that a uniform approach is taken when conducting Form 5500 examinations. The following guidance on general examination techniques and procedures used to conduct examinations of qualified retirement plans is provided for EP examiners. The procedures outlined within this section are designed to be used as a guide for EP examiners when examining a Form 5500 and are not intended to be all inclusive.

Certain provisions were enacted into law under the IRS Restructuring and Reform Act of 1998 (RRA), which impact the procedures relating to the EP examination program. Some of the RRA provisions discussed herein include:

The Employee Plans (EP) examination program was established to ensure compliance with the qualification provisions of Internal Revenue Code (IRC) 401(a) and 501(a). Under this program, the returns within EP’s jurisdiction may include, but are not limited to—

The Wage and Investment (W&I), Small Business/Self–Employed (SB/SE) and Large and Mid-Size Business (LMSB) Operating Divisions have examination responsibility for other Federal tax returns. However, EP examiners are required to perform a package audit and inspect federal returns to ensure they have been filed properly. See IRM 4.71.1.13.

During an examination of a Form 5500, an EP examiner may identify certain issues which may affect other line items on a related income tax return such as Forms 1040 or 1120, etc. The Discrepancy Adjustment Program was established to reduce the number of referrals to W&I, SB/SE or LMSB . This program allows an EP examiner to make certain line item adjustments to Forms 1040 and 1120 with respect to issues arising from an examination of a Form 5500. The Discrepancy Adjustment Program does not entirely preclude EP exams from being referred to W&I, SB/SE, or LMSB . If the adjustment does not fall within the guidelines of the Discrepancy Adjustment Program, a referral may be made to W&I, SB/SE, or LMSB (whichever is applicable). See IRM 4.71.4 for discrepancy adjustment procedures.

During an examination of an individual (Form 1040) or corporate (Form 1120) income tax return, a W&I, SB/SE or LMSB agent may identify issues that involve a Form 5500 series return or other return that falls within EP’s jurisdiction and vice versa. For this reason, procedures have been established for referring cases between W&I, SB/SE, or LMSB and EP . See IRM 4.71.6 for EP referral procedures.

The primary objective of the examination is to determine if the plan is operating in accordance with the qualification provisions of the Internal Revenue Code and with the terms of the plan document. A second objective is to protect the Government's interest regarding income and excise tax liabilities related to the plan. Most of the qualification provisions and tax issues will fall into the following categories and should be addressed during the audit, as applicable.

Compliance in Form - Plan and Entity Background. Include a brief write-up on the plan’s history, including the most recent favorable determination letter and subsequent amendments.

Package Audit. Determine whether the package audit requirements as specified in IRM 4.71.1.13 and its subsections are satisfied. Package audit requirements vary depending on whether the examination is focused or full scope.

Eligibility/Participation/Coverage. Determine whether all eligible employees are participating in the plan in accordance with the standards of IRC 410.

Vesting. Determine whether the minimum vesting standards of IRC 411 and, if applicable, IRC 416 are met.

Allocations/Accruals. Determine whether the contributions, accruals and forfeitures are calculated correctly, in accordance with the plan provisions and IRC 411. Also, verify that the allocations and/or accruals are not discriminatory under IRC 401(a)(4).

Top-Heavy. Determine whether the plan is top-heavy and if so, that it is operating in accordance with the plan provisions and IRC 416. See IRM 4.72.5 for further technical guidance.

Discrimination.

IRC 401(k)/401(m). Determine whether the plan passes the ACP and ADP tests (and multiple use test, if applicable). See IRM 4.72.2, Cash or Deferred Arrangements, and 4.72.3, Employee Contributions and Matching Contributions, for technical guidance on auditing plans with IRC 401(k) and/or 401(m) provisions.

Deduction Limitation. Determine whether the total amount of employer contributions are within the limits set by IRC 404, and that all contributions were timely paid per IRC 404. Verify, in applicable defined benefit plans, that all gains or losses (such as cash surrender values, dividends, refund of premiums, etc.) are used to reduce the cost to the taxpayer in the current or next succeeding year, or are properly amortized. See IRC 404 and 412. See IRM 4.72.15, IRC 404 Examination Guidelines , for technical guidance related to IRC 404.

Minimum Funding. Determine if the minimum funding standards of IRC 412 are met, and if not, determine tax due under IRC 4971.

Review of the Trust.

IRC 415 Limits. Determine whether or not the maximum benefit and/or contribution limits under IRC 415, are exceeded. The plan should contain language, when necessary, that coordinates with other plans of the employer (or related employer) to assure benefit and/or contribution limits are not exceeded. See IRM 4.72.6 and IRM 4.72.7 for technical guidance related to IRC 415.

Distributions. Verify that distributions to participants (terminated or otherwise) have been made in accordance with the plan provisions relating to the form (lump sum, annuity, etc.) and the timing (paid immediately, after a break-in-service, etc.) of distributions, and that the amount distributed was correct. Also check that the employer or trustee has submitted the required reports (i.e., Form 1099-R) pertaining to those individuals, and that the correct tax under IRC 3405 has been withheld. See IRM 4.72.9 and 4.72.10 for technical guidance related to forms of benefits and distributions.

ESOP Plans. Verify that the ESOP requirements under IRC 409 and 4975 have been met. See IRM 4.72.4, ESOPs , for technical guidance.

IRC 403(b) Plans. Follow established procedures as reflected in IRM 4.72.13, IRC 403(b) plans.

Multiemployer Plans. Follow established procedures as reflected in IRM 4.72.14, Multiemployer Plan Examination Guidelines.

SEP Plans. Follow established procedures as reflected in IRM 4.72.17, Simplified Employee Pensions (SEPs) and Salary Reduction SEPs (SARSEPs).

The focused examination methodology is the standard approach to conduct examinations.

Full scope examinations will only be conducted on training cases, certain designated special project cases and with written approval by the group manager.

Surveying a case also requires written approval by the group manager.

Group managers will establish a process to allow expanding the scope of focused examinations and require written approval if more than two additional issues are selected.

The scope and depth of the examination will depend on a number of factors, for example:

Once the issues have been identified, the agent is expected to pursue the examination of each issue to the point where a clear conclusion can be reached regarding the issue.

The scope of the examination may depend on the adequacy of the taxpayer’s records. The examiner is expected to continue the examination to a point where it is reasonably certain that the information return requirements and qualification requirements have been fulfilled. If the records are inadequate, the examination should include consideration of the issuance of an inadequate record notice under IRC 4.71.1.17.

All necessary action to protect the Government’s interest must be taken in a case when expiration of the statutory period for assessment of any additional or potential tax is imminent. This responsibility extends not only to the liability of the entity, but also to the liabilities of the related taxpayers. See IRM 4.71.9 and IRM 25.6 for procedures on statute control.

A pre-audit analysis is required for both focused examinations and full scope examinations.

The steps taken and the conclusions reached during the pre-audit analysis should be recorded in the workpapers.

Prior to contacting the entity, the grade of the case should be verified in accordance with EP Examination Case Grading Criteria per IRM 7.11.2..

Form 5464, Case Chronology Record, is used on all examinations to document all actions taken and all persons contacted.

Prior to sending the appointment letter , analyze the return taking into consideration the items listed in the Examination Program Guide section of Form 5772, EP/EO Workpaper Summary.

All EP examinations must be coordinated with any examination of the related income tax returns. An IDRS transcript of the taxable return can be requested using Form 6882. A BMFOLT (Form 1120) or IMFOLT (Form 1040) transcript of the taxable entity will indicate whether the taxable return is under examination in W&I, SB/SE, or LMSB. Transaction code (TC) 420 indicates that the return is under examination, and TC 421 indicates that the examination has been completed. An AMDIS print should be secured to determine the current status and group number. The EP classification specialist can be contacted at 410-962-9536 to locate the telephone number of the W&I, SB/SE, or LMSB group that has the return.

To the extent possible, IDRS research should also be utilized to provide additional information regarding the employer (including whether or not related returns such as Forms 940 and 941 were filed), the plan under examination, and other plans maintained by the employer. Examiners should use IDRS research to verify filing of certain returns and also to view line items for a particular tax period for a particular return. Form 6882 can be used for the request. Some of the more useful IDRS command codes are listed below. See IRM 4.71.2, Overview of IDRS, for more information on IDRS.

As part of the pre-audit analysis:

Taxpayers may be contacted by telephone (with written confirmation) or in writing to schedule the initial appointment. Schedule appointments at a time and date convenient to the taxpayer, but within 30 days of the telephone call.

To confirm or set the appointment, send:

Pub. 1EP, Understanding the Employee Plans Examination Process, must be included with all initial notification contacts, including the appointment letter or OCEP notification letter. If it has not been mailed to the taxpayer in advance of the interview, provide it at the initial meeting. The publication fulfills the requirement in IRC 7521(b)(1)(A) that taxpayers be informed of the examination process and their rights under such process at or before the initial interview. See RRA 3503.

Address the letter to the taxpayer at their last known address. Unless another reliable source is available, solicit an INOLES print to determine the taxpayer's last known address.

Specify, in writing, which documents and files are needed for the examination. List the records to be made available during the examination.

Unless facts and circumstances dictate otherwise, the examination should be conducted at the plan sponsor's place of business. IT Regulation Section 301.7605-1(d) states, in part, "A field examination will generally take place at the location where the taxpayer’s original books, records, and source documents pertinent to the examination are maintained. In the case of a sole proprietorship or taxpayer entity, this will usually be the taxpayer’s principal place of business."

Reasons for holding the examination at the plan sponsor's place of business include:

If holding the examination at the plan sponsor's place of business is not a viable option, (for example, if the examiner’s presence would disrupt the business operations), the examiner should request an opportunity to conduct a walk-through of the business premises and to have an opportunity to direct questions the POA cannot adequately answer to the plan sponsor or an employee who can. These visits could be scheduled prior to the start time of the business (for example, before office hours at a doctor’s office).

Although initial contact with the taxpayer may be made in writing, examiners should contact the taxpayer by telephone prior to the audit date to discuss the availability of books and records.

Once an appointment is agreed to, it should be kept unless there are extenuating circumstances.

If the initial contact letter is returned to the Service by the Post Office as undeliverable, take the following steps to obtain the taxpayer’s current address:

Use Form 5464, Case Chronology Record, to document the steps taken to locate the taxpayer. If the taxpayer’s correct address is found, re-mail the correspondence.

Examiners are not authorized to assure taxpayers that their books and records will be used solely for civil purposes.

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AIMS should be updated anytime there is a change in the status of a case.

AIMS should also be updated whenever the statute of limitations is updated.

An AIMS print should be secured and included in the case file anytime an AIMS update is made.

Form 2848, Power of Attorney and Declaration of Representative , is used to authorize an attorney, certified public accountant, enrolled agent, enrolled actuary, or other qualified person to represent a taxpayer before the IRS. See IRM 1.25.1, Rules Governing Practice Before the Service.

A valid Form 2848 should contain the following information:

In addition, the representative(s) must list the following in the "Jurisdiction/Identification" column:

If a representative, who is appointed by the taxpayer, is not qualified to sign Part II of Form 2848, the form should not be honored and will be returned to the taxpayer. An invalid Form 2848 should not be treated as authority for the individual to receive tax information.

Although an unenrolled return preparer may still represent the taxpayer with respect to the return that he or she prepared, section 5 of Revenue Procedure 81-38 does limit this authority. An unenrolled return preparer may not represent a taxpayer before Appeals or Collection, execute closing agreements, extend the statute of limitations, execute waivers, execute claims for refund, receive refund checks or sign any documents for a taxpayer. (Detailed information on this is provided in Rev. Proc. 81-38 and Publication 470, Limited Practice without Enrollment).

In a situation where the taxpayer appoints an individual to represent them during an examination and the person appointed is not qualified to sign Form 2848, the taxpayer should be advised to submit Form 8821, Tax Information Authorization. This will authorize the individual to receive or inspect tax return information, but this will not authorize the individual or organization to represent the taxpayer before the IRS.

A copy of Forms 2848 or 8821 secured during an examination should be forwarded before the case is closed to the appropriate Service Center.

For other helpful information related to Power of Attorney and third party authorizations, see the IRS website at: http://serp.enterprise.irs.gov/databases/irm-sup.dr/poa.dr/poa-toolkit.htm.

The provisions of IRC 6103 and the regulations thereunder apply to all third party contacts. See IRM 11.3, Disclosure of Official Information.

Generally, contacts with third parties are made when we are unable to obtain the information from the taxpayer/representative or to verify information provided by the taxpayer/representative. However, employees should make every effort to first obtain information from the taxpayer/representative.

IRC 7602(c) requires the IRS to:

IRC 7525 extends the attorney–client privilege in noncriminal cases to communications between taxpayers and other federally authorized tax practitioners. No equivalent confidentiality privilege existed as to communications between taxpayers and other federally authorized tax practitioners prior to the enactment of this provision.

The statute applies to any noncriminal tax matter before the IRS or any noncriminal tax proceeding in a Federal court. It does not apply to written communications between a federally authorized tax practitioner and certain representatives of an entity in connection with the promotion of direct or indirect participation in a tax shelter. This privilege is not automatic, but it must be asserted by the taxpayer. The privilege may be asserted orally or in writing.

This provision is effective for privileged communications made on or after the date of enactment of RRA 3411. This means that certain communications (oral or written) between federally authorized tax practitioners and taxpayers made on or after July 22, 1998, may now be privileged communications within the meaning of the statute and may be withheld from the Service.

The initial interview is an important part of the examination process. Interviews provide information not available from other documents. A properly planned and executed interview will provide an understanding of the taxpayer’s financial history, business operations, and accounting records.

An in-depth interview is required for both focused and full scope examinations.

An in-depth interview should be planned in advance to address items specific to the taxpayer under examination. The type of return, potential issues, and relevant facts and circumstances should be considered in the interview plan.

Unless facts and circumstances dictate otherwise, the initial interview should be conducted at the plan sponsor's place of business. IT Regulation Section 301.7605-1(d) states, in part, "A field examination will generally take place at the location where the taxpayer’s original books, records, and source documents pertinent to the examination are maintained. In the case of a sole proprietorship or taxpayer entity, this will usually be the taxpayer’s principal place of business."

Reasons for holding the initial interview at the plan sponsor's place of business include:

If holding the initial interview at the plan sponsor's place of business is not a viable option, (for example, if the examiner’s presence would disrupt the business operations), the examiner should request an opportunity to conduct a walk-through of the business premises and to have an opportunity to direct questions the POA cannot adequately answer to the plan sponsor or an employee who can. These visits could be scheduled prior to the start time of the business (for example, before office hours at a doctor’s office).

If the interview is not conducted with the plan sponsor, it should be conducted with a person having sufficient knowledge concerning the plan’s financial status and operations.

The following provisions under IRC 7521, enacted as part of the Taxpayer Bill of Rights, also affect taxpayer interviews:

During the initial interview, the examiner should include an explanation of the examination process and appeal rights, as set forth in Pub. 1EP, Your Rights as a Taxpayer. The case file should contain documentation that Pub. 1EP was issued to the taxpayer.

The workpapers should document who was interviewed and the extent of the issues discussed. Interviews should be documented in sufficient depth to give a clear understanding of the taxpayer and the plan operations.

Requests by taxpayers or their representatives to make tape, stenographic or other verbatim recordings of examination proceedings will ordinarily be allowed, except where the taxpayer’s or representative’s behavior is clearly disruptive of the normal examination process or investigative proceeding. Requests to videotape or otherwise film examination proceedings will not be granted.

In situations where a taxpayer or his/her representatives requests to make tape, stenographic or other verbatim recordings of examination proceedings, the examiner will generally concur subject to the following provisions:

Immediately refer any request to make a tape, stenographic or other verbatim recording to the group manager for approval. If granted, the manager will arrange an appropriate time and suitable location in an IRS office where equipment is available to make the Service’s recording.

If a taxpayer, legal representative, or witness appears in an examination proceeding and requests to make a verbatim recording without the Service’s prior knowledge of this intent, the examiner, with approval of the group manager, may attempt to make arrangements for space and recording equipment in order for the proceedings to continue.

At the outset of the recording, the examiner must identify himself/herself, the date, time, place, and purpose of the proceeding. Each participant in the proceeding also must identify himself/herself, his/her role in the proceeding, and acknowledge and consent to the making of a verbatim recording. If an additional participant arrives or a participant leaves the proceeding, note these facts on the recording.

When written records are presented during the proceeding, they must be described in sufficient detail to make the verbatim recording a meaningful record when matched with the other documentation contained in the case file.

At the conclusion of the proceeding, state that the proceeding has been completed and the recording is ended.

The recording produced by the Service should be immediately reviewed for clarity and substance and, if needed, a complete written report of the conference should immediately be prepared.

During the course of auditing the assigned return, the EP examiner should determine whether the plan sponsor is filing or has filed other federal tax or information returns he/she is required to file. In the interest of conserving resources, increasing compliance, and reducing multiple contacts with taxpayers, this responsibility also extends to various returns under the jurisdiction of Large and Mid-Size Business (LMSB), Small Business/Self-Employed (SB/SE), or Wage and Investment (W&I) (collectively referred to as Exam Functional Units). See Policy Statement P-4-4 in IRM 1.2.1.4.2

As discussed in paragraph 6 of IRM 4.71.1.5 above, during the pre-audit analysis phase of the examination, EP examiners should utilize internal sources of information such as the Integrated Data Retrieval System (IDRS) to verify the filing of prior and subsequent year Forms 5500 series returns, related returns, and other returns the taxpayer is required to file. Utilizing internal sources will decrease taxpayer burden to provide copies of returns at the time of the actual examination. With respect to the required inspection of prior and subsequent Forms 5500 series returns, as provided in IRM 4.71.1.13.1, ERTVU can be used to view the Form 5500 line items for a particular tax period to determine audit potential.

Examples of returns that fall under package audit requirements for a full scope examination include:

For focused examinations the following guidelines apply:

If the taxpayer has not filed a required return, attempt to obtain the delinquent return (unless fraud or willful failure to file is indicated). See IRM 4.71.3, Unagreed, Delinquent and Substitute Form 5500 Examination Procedures, for delinquent and substitute Form 5500 procedures.

If the taxpayer refuses to file a required return and the return is under the jurisdiction of EP, discuss the issue with your manager and determine whether an examination of that year should be initiated.

If a return has not been filed that is not under the jurisdiction of EP, make a referral on Form 5666 as specified in IRM 4.71.6.6.

If it is determined that an issue exists on a return that is not under the jurisdiction of EP, make a referral on Form 5666 as specified in IRM 4.71.6.6.

If it is determined that an issue exists on the related income tax return (i.e., Forms 1120 or 1040), refer to IRM 4.71.4 to determine whether a discrepancy adjustment should be initiated or a referral should be made to the appropriate Exam Functional Unit.

To satisfy the package audit requirements, the workpapers should include documentation to support the audit steps taken and the conclusions reached.