The Employee Plans Function Has Improved the Process for Selecting Retirement Plans for Examination
May
10, 2011
Reference
Number: 2011-10-050
This report has cleared the Treasury Inspector General for Tax Administration disclosure review process and information determined to be restricted from public release has been redacted from this document.
Phone
Number | 202-622-6500
Email Address | TIGTACommunications@tigta.treas.gov
Web Site |
http://www.tigta.gov
HIGHLIGHTS
THE EMPLOYEE PLANS FUNCTION HAS
IMPROVED THE PROCESS FOR SELECTING RETIREMENT PLANS FOR EXAMINATION
Highlights
Final Report issued on May 10, 2011
Highlights of Reference Number:
2011-10-050 to the Acting Internal Revenue Service Commissioner for the
Tax Exempt and Government Entities Division.
IMPACT ON TAXPAYERS
The
primary objective of Employee Plans function examinations is to determine if
retirement plans are operating in accordance with the tax‑exempt
qualification provisions of the Internal Revenue Code and within the terms of
the plan document. If a retirement plan is not in compliance,
the Employee Plans function works with retirement plan
officials to resolve examination issues and bring the retirement plan back into
compliance. The Employee Plans function has improved its ability to
select examinations that identify noncompliance, as evidenced by an increase in
the percentage of examinations where noncompliance with the Internal Revenue
Code has been detected. Ensuring that plans comply with all
applicable statutes and regulations provides plan participants with greater
assurance that promised benefits will be available upon retirement.
WHY TIGTA DID THE
AUDIT
TIGTA initiated this audit in response to a
request from the Internal Revenue Service to review the Employee Plans
function’s selection methodology for risk‑based targeted
examinations. Our overall objective was
to determine whether the Employee Plans function’s processes for selecting
examination cases allow for emerging issues to be considered and take into
account the risk of noncompliance for the retirement plan universe.
WHAT TIGTA FOUND
TIGTA
determined that the Employee Plans function’s methods for selecting
examinations have evolved over the years and examinations are now identifying a
larger percentage of retirement plans that are noncompliant. Identifying noncompliance through the
examination program ensures that Employee Plans function resources are being
used wisely, and reduces the burden on plan sponsors and administrators by
focusing on retirement plans most likely to have compliance issues.
The
Employee Plans function has accomplished this improvement by developing methods
for selecting examination cases that allow for emerging issues to be
considered, while taking into account the risk of noncompliance for the
retirement plan universe. For example,
the most productive examinations (those that identify retirement plans that are
noncompliant) have been the result of special projects, abusive transactions,
and referrals. Over the past five years,
these three areas have consistently identified the highest degree of
noncompliance. In addition, the Employee
Plans function’s risk‑based examinations are becoming more productive
based on historical results of examinations from particular market segments.
WHAT TIGTA RECOMMENDED
TIGTA
made no recommendations in this report. Tax Exempt and Government Entities Division management
reviewed the report before it was issued and
offered clarifying comments and suggestions, which have been taken
into account.
May 10, 2011
MEMORANDUM FOR ACTING COMMISSIONER, TAX EXEMPT AND GOVERNMENT ENTITIES DIVISION
FROM: Michael R. Phillips /s/ Michael R. Phillips
Deputy Inspector General for Audit
SUBJECT: Final Audit Report – The Employee Plans Function Has Improved the Process for Selecting Retirement Plans for Examination (Audit # 201110002)
This report presents the results of our review to determine whether the Employee Plans
function’s processes for selecting examination cases allow for emerging
issues to be considered and take into account the risk of noncompliance for the
retirement plan universe. This review was requested by the Internal
Revenue Service and is included in our Fiscal Year 2011 Annual Audit Plan and addresses the major management challenge of Tax
Compliance Initiatives.
We made no recommendations in
this report. Tax Exempt and Government
Entities Division management reviewed the report before it was issued and
offered clarifying comments and suggestions, which were taken into
account.
Copies of this report are also being sent to the Internal Revenue Service managers affected by the report results. Please contact me at (202) 622-6510 if you have questions or Nancy A. Nakamura, Assistant Inspector General for Audit (Management Services and Exempt Organizations), at (202) 622-8500.
Examination
Selection Methods Have Evolved and Now Result in More Noncompliance Being
Detected
Appendices
Appendix
I – Detailed Objective, Scope, and Methodology
Appendix
II – Major Contributors to This Report
Appendix
III – Report Distribution List
There are over 867,000
retirement plans in existence with assets totaling approximately $5.3 trillion. The Employee Retirement Income Security Act[1] sets uniform standards to assure that
employee benefit plans are established and maintained in a fair and financially
sound manner. The Internal Revenue
Service (IRS) Employee Plans function is responsible for ensuring sponsors of
employee retirement plans comply with applicable statutes and regulations that
are designed to ensure that employees receive promised benefits. The Employee Plans function accomplishes this
by helping customers understand and comply with applicable tax laws and by protecting
the public interest by applying the tax law with integrity and fairness to all.
Examinations determine if retirement plans are operating in
accordance with tax-exempt laws and the terms of the plan to ensure plan
participants receive promised benefits.
Retirement plan
assets and participants’ benefits are protected through a fair, objective, and
effective compliance program. One part
of an effective compliance program is examinations. The primary objective of examinations is to
determine if retirement plans are operating in accordance with the tax-exempt
qualification provisions of the Internal Revenue Code and within the terms of
the plan document, which is designed to ensure that retirement plan
participants receive the benefits promised by the plan.[2]
Examinations are
performed to ensure that retirement plan sponsors are making contributions to
the plan as required, assets truly exist to satisfy liabilities and are
properly classified, and retirement plans are operating in accordance with the
plan design. If a retirement plan is not
in compliance, Employee Plans function examiners work
with retirement plan officials to resolve examination issues and bring the
retirement plan back into compliance. While
the primary goal is for plans to make changes necessary to fully comply, the
IRS can assess penalties, taxes, and interest charges, or completely disqualify
a retirement plan from tax-exempt status if major violations are found.
Employee Plans
function management was using the following priority order for assigning examination
work based on the timing of workload needs, the location of case work, and the
availability of resources.
1)
Special
Projects and Abusive Tax Avoidance Transactions (hereafter referred to
as abusive transactions) – Special projects are used to strategically
select examinations based on the Employee Plans function’s research program,
changes made to the Annual Return/Report of Employee Benefit Plan (Form 5500) return, historical
examination data, and other emerging issues such as legislative changes. In addition, the Employee Plans function
participates in an IRS-wide effort to address abusive tax shelter schemes and
promotions. When selecting returns to be
examined, special projects and abusive transactions are given the highest
priority.
2)
Referrals – The Employee Plans function receives referrals throughout the year
when there are questions or concerns that employers or retirement plan sponsors
may not be complying with the Internal Revenue Code sections governing employee
benefit plans. Referrals originate from
a variety of sources both within and outside the IRS.
3)
Risk‑Based
Targeted (hereafter referred to as risk-based) Examinations – In Fiscal Year 2008, the Tax Exempt and Government Entities Division
issued a report on compliance risk assessments that defined what it considered
to be noncompliance for employee retirement plans and developed a market
segment framework[3] for selecting examinations to be
conducted. The framework divided the
population of retirement plans into 20 different industry segments, each
with 11 different types of retirement plans.
Between Fiscal
Years 2002 and 2008, the Employee Plans function reduced the number of market
segments and developed a risk-based approach for selecting examinations. The Employee Plans function accomplished this
by identifying market segments for which it had completed examinations for a
sample of plans and found significant noncompliance[4] in either the entire market segment or parts
of it. The above report also described
how the process evolved, outlined examination results, and recommended risk-based
segments for further evaluation as a source for selecting examinations.
A subsequent report in August 2010 described how the Employee Plans
Examinations function was winding down its evaluation of examination results for
market segments and using the knowledge gained from it to move forward with the
risk‑based approach that is currently being used.
4)
Other – Other sources of examinations include general case work and training
cases, which are used to fill a specific business need. General case work includes returns which do
not fall under a specific category such as those above and which are assigned
to balance return assignments to field staff for efficient use of travel
funds. Training cases are generally
assigned to less-experienced or newly hired employees and normally involve
simpler issues.
This review was
performed at the Tax Exempt and Government Entities Division Employee Plans
Examination function in Baltimore, Maryland, during the period September 2010
to February 2011. We conducted this
performance audit in accordance with generally accepted government auditing
standards. Those standards require that
we plan and perform the audit to obtain sufficient, appropriate evidence to
provide a reasonable basis for our findings and conclusions based on our audit
objective. We believe that the evidence
obtained provides a reasonable basis for our findings and conclusions based on
our audit objective. Detailed
information on our audit objective, scope, and methodology is presented in
Appendix I. Major contributors to the
report are listed in Appendix II.
The Employee
Plans function has improved its ability to select retirement plan examinations
that identify noncompliance, as evidenced by an increase in the percentage of
examinations where noncompliance with the Internal Revenue Code has been detected. Examinations are performed to ensure that
plan sponsors are making contributions to the plan as required, assets truly
exist to satisfy the liabilities and are properly classified, and plans are
operating in accordance with the plan design.
Identifying noncompliance through the examination program ensures that Employee
Plans function resources are being used wisely and reduces the burden on other plan
sponsors and administrators by focusing on retirement plans most likely to have
compliance issues.
The Employee
Plans function has accomplished this improvement by developing methods for
selecting examination cases that allow for emerging issues to be
considered, while taking into account the historical risk of noncompliance for
the retirement plan universe. For example, the most productive examinations[5] have been the result of special projects,
abusive transactions, and referrals. Over
the past 5 years, these 3 areas have consistently identified the highest degree
of noncompliance. In addition, the
Employee Plans function’s risk-based examinations are becoming more productive
based on historical results of examinations from particular market
segments.
Examination Selection Methods Have Evolved and Now Result in More Noncompliance Being Detected
To
assist the Employee Plans function in meeting its mission of protecting
retirement plan assets and the benefits of plan participants, the examination
program should focus its resources on identifying noncompliant plans and
bringing them back into compliance. During
our audits,[6] we have determined the Employee
Plans function’s methods for selecting examinations have evolved over the years
and examinations are now identifying a larger percentage of retirement plans
that are noncompliant (as evidenced by a change being made to the retirement
plan return as a result of an examination).
Figure 1 shows the increase in changes made to retirement plan returns
over the past 5 fiscal years.
Figure 1: Percentage
of Examinations Resulting in a Change to the Return
(Fiscal Years 2006–2010)
Figure 1 was
removed due to its size. To see Figure
1, please go to the Adobe PDF version of the report on the TIGTA Public Web
Page.
The reason the
Employee Plans function has been able to select examinations that reveal more
noncompliance than in the past is that it has conducted analyses of
historical results, continually updated its areas of emphasis as more knowledge
is gained about the retirement plan universe, and considered issues emerging in
the retirement plan community. This has
resulted in increased identification of noncompliant areas in retirement plans.
Over the last 5
years, one of the Employee Plans Examination function’s highest priorities has
been examinations related to special projects, abusive transactions, and
referrals. Historically, these sources generally
resulted in a change to the tax return at a rate higher than other types of
examinations and have increasingly higher change rates over the past several
years. For example, the change rate for special
project, abusive transaction, and referral examinations increased from 67 to 81
percent from Fiscal Year 2006 to Fiscal Year 2010, and exceeded the overall
change rate shown in Figure 1 for Employee Plans examinations in each of these fiscal
years. By Fiscal Year 2010, the number
of returns examined in these three areas nearly doubled and the rate at which
there was a change to the return climbed to over 80 percent. The shift in focus to these three areas is a
logical progression because these examinations result in a higher amount of
noncompliance being detected than the amount uncovered by other methods.
The Employee Plans
function also developed a risk-based approach to concentrate on market segments
or parts of market segments most likely to be noncompliant. By mid-Fiscal Year 2006, the Employee
Plans function summarized results from segments of its
risk-based examination program for which there were a sufficient number of
completed examinations. From that point
forward, the only risk-based returns assigned to field examination staff were
from segments for which the Employee Plans function had found significant
noncompliance either in the entire segment or in parts within a segment in its
baseline analysis.[7]
Since that time,
there has been an overall increase in the amount of noncompliance detected by
risk-based examinations. This correlates
with the Employee Plans function’s continuing validation of its market segments
and adopting a risk-based approach to focus on particularly noncompliant market
segments or parts of market segments.
Figure 2
shows the progression of the Employee Plans function’s workload selection for Fiscal
Years 2006 through 2010.
|
Fiscal Year |
Special Projects, Abusive Transactions, and Referrals |
Risk-Based |
All Other |
Total[8] |
|
2006 |
23.1% |
74.3% |
2.6% |
100.0% |
|
2007 |
34.3% |
61.6% |
4.0% |
100.0% |
|
2008 |
33.9% |
62.8% |
3.3% |
100.0% |
|
2009 |
47.5% |
50.3% |
2.2% |
100.0% |
|
2010 |
42.9% |
55.1% |
2.0% |
100.0% |
Source: Audit Information Management System Reports
for Fiscal Years 2006 to 2010.
During Fiscal Year
2006, Employee Plans function staff also began using a focused examination
methodology when analyzing returns. Using
this process, Employee Plans function examination staff narrows the scope of
the examination. Initially, the
examinations are assigned three pre‑identified issues that are required
for consideration (based on historical data and other criteria). The examiners are then expected to perform a
pre-audit analysis, using various resources at their disposal, including
analyzing the internal controls and focusing on areas where internal controls
are weak. If initial contact with the
taxpayer shows good internal controls and no areas of concern, the scope of the
examination can be limited; however, the examiner must still address the three pre-identified
issues. Conversely, if the examination
staff identifies any areas of concern, the examination can be expanded to
ensure the plan is compliant in these areas.
Figure 3 was removed due to its size. To see Figure 3, please go to the Adobe PDF
version of the report on the TIGTA Public Web Page.
The following sections provide additional details on the results of:
·
Special project, abusive
transaction, and referral examinations.
·
Risk-based
examinations.
·
Other
types of examinations.
Special project, abusive
transaction, and referral examinations
Special project and
abusive transaction examinations allow the Employee Plans function the
flexibility to address issues across market segment boundaries and address any
sector of the retirement plan universe.
This means that the Employee Plans function can potentially address
plans in market segments that are not currently being addressed by the
risk-based examination approach. Future
special projects may also be able to address sectors of the retirement plan
universe that are not required to annually file a Form 5500.[9] Plans
are underway to determine techniques for accomplishing this.
Referrals can come
from within the Employee Plans function through its Employee Plans Compliance
Unit, from other IRS operating divisions that may be conducting tax return examinations
of an individual’s or company’s books and records, or outside sources such as
the Department of Labor. Referrals are
distributed as part of the regular workload of Employee Plans Examination
function groups in lieu of being considered discretionary work. Referral
examinations have consistently resulted in very high rates of noncompliance
and, as a result, a high emphasis is placed on ensuring that all referrals are
examined. The percentage of
noncompliance detected for referrals ranged from 65.5 percent to 83.8 percent
from Fiscal Year 2006 to Fiscal Year 2010.
Figure 4 contains
the overall change rates and average assessments[10] for special project, abusive transaction,
and referral examinations for Fiscal Years 2006 through 2010.
|
Fiscal Year |
Special Projects |
Abusive
Transactions |
Referrals |
Average for Special
Projects, Abusive Transactions, and Referrals |
|
Change
Rate |
||||
|
2006 |
66.2% |
81.3% |
65.5% |
67.0% |
|
2007 |
49.9% |
90.6% |
73.2% |
62.9% |
|
2008 |
57.8% |
85.0% |
78.6% |
70.2% |
|
2009 |
62.3% |
88.1% |
83.8% |
76.2% |
|
2010 |
72.2% |
89.8% |
75.7% |
80.4% |
|
Average
Assessment[11] |
||||
|
2006 |
$1,045 |
$20,971 |
$1,754 |
$2,791 |
|
2007 |
$778 |
$1,716 |
$1,964 |
$1,178 |
|
2008 |
$1,102 |
$13,741 |
$140,575 |
$1,891 |
|
2009 |
$2,337 |
$13,349 |
$17,896 |
$2,824 |
|
2010 |
$1,991 |
$18,064 |
$24,235 |
$3,462 |
Source: Audit Information Management System Reports
for Fiscal Years 2006 to 2010.
Given the overall high change rates, examinations associated with
special projects, abusive transactions, and referrals are identifying more
compliance problems, providing better protection of taxpayers’ retirement
funds, and using Employee Plans function examination resources in an efficient
and effective manner. Also, since
projects can be the result of a number of factors including the type of plan
and/or the issue involved, selection of work may cross market segments, which
provides broader coverage for segments that may not have historically shown a
high rate of noncompliance and thus may not be included if the risk-based
approach were the only method being used.
Risk-based examinations
During Fiscal Year 2001, the Employee Plans function started a risk assessment
approach to analyze its customer population by dividing its retirement plan
population into market segments based on plan type and principal business
activities. Between Fiscal Years 2002
and 2006, the Employee Plans function’s market segment approach went through
several modifications, including reducing the number of market segments, tracking
and evaluating the extent of noncompliance as market-segment examinations were
completed, and changing sampling methods to be more efficient.
Beginning in Fiscal Year 2006, the Employee Plans function refined the market-segment
approach to direct resources to segments having the most noncompliance. To accomplish this, Employee Plans function management decided to stop working on any new
market segments and concentrate on finishing market segments with examinations
in process.
From that point forward, the only market-segment returns assigned to
the Employee Plans examination staff were from segments, referred to as
risk-based segments, determined to be highly noncompliant through baseline
examinations.[12] In
general, examiners are assigned cases from this category when there are either
no cases from special projects, abusive transactions, and referrals remaining
or when the examiners’ skills do not match up with the skills required to
perform higher priority examinations.
When summarizing the results of its initial market-segment approach, the
processes that the Employee Plans function used included a sufficient number of
examinations to conclude the results were reliable. In addition, the Employee Plans function used
a sound process to validate its market-segment approach and ensure it identified
productive sources for examinations.
This process included completing its analysis of seven market-segments and
posting detailed summaries to the “public” portion of its web site. Each
summary included an overall assessment of compliance within the segment (e.g.,
high noncompliance) and a detailed description of any noncompliance noted
during examinations. Also included were suggested actions that plan
sponsors could take to avoid errors resulting in noncompliance. For these 7 segments, Employee Plans staff
completed 7,175 examinations, of which 2,723 (38 percent) resulted in a
change to the return.
As shown previously in Figure 3, these examinations resulted in a
change to the tax return at a rate lower than the special project, abusive
transaction, and referral examinations and the overall rate for Employee Plans function examinations as a whole. However, since Fiscal Year 2006 the Employee
Plans function has improved its ability to identify noncompliance related to
returns selected using a risk-based approach, as shown in Figure 5 below.
Figure 5: Change Rates and Assessments: Risk-Based Examinations (Fiscal Years
2006–2010)
|
Fiscal
Year |
Change
Rate |
Average |
|
2006 |
42.0% |
$1,247 |
|
2007 |
52.3% |
$367 |
|
2008 |
54.2% |
$1,205 |
|
2009 |
57.4% |
$2,225 |
|
2010 |
53.7% |
$1,088 |
Source: Audit Information Management System Reports for Fiscal Years 2006 to 2010.
Prior to the above changes, the processes used to select specific types
of plans for examination had historical change rates that were significantly
lower. For example, staff from the
Employee Plans function provided data for the historical change rate[13] associated with specific risk-based
segments. This information also included
the results of examinations from the initial risk-assessment process completed
during Fiscal Years 2004 to 2006 and from examinations completed as part of the
risk-based targeted approach used starting in Fiscal Year 2006.
Figure 6 shows the evolution of the Employee Plans function’s
examination approach since the 1990s, as well as the improvement in the
percentage of noncompliance detected for 10 risk-based segments, which
accounted for nearly 70 percent of all closures since the inception of the market-segment
approach. Almost all segments show a
marked increase in noncompliance detected in the early years of the market
segment approach compared to the 1990s.
Most segments show an even greater percentage of noncompliance being
detected since moving to the risk-based approach in Fiscal Year 2006.
Figure 6: Comparison of Historical Change Rates for 10
Market Segments
|
Plan Type |
Risk-Based
Market Segment |
Historical
Change Rate |
Risk
Assessment Baseline Change Rate |
Risk-Based
Examinations Change Rate |
|
401k |
Professional,
Scientific, Technical Services |
21.0% |
49.8% |
44.1% |
|
401k |
Wholesale |
22.1% |
39.0% |
44.3% |
|
Profit
Sharing |
Wholesale |
22.6% |
33.9% |
39.5% |
|
401k |
Health
Care & Social Assistance |
23.1% |
33.6% |
45.7% |
|
401k |
Finance
& Insurance |
20.2% |
29.5% |
40.6% |
|
401k |
Manufacturing |
23.6% |
35.3% |
46.8% |
|
401k |
Construction |
21.0% |
41.1% |
42.8% |
|
Profit
Sharing |
Construction |
22.8% |
16.6% |
43.0% |
|
401k |
Retail |
22.8% |
44.3% |
55.7% |
|
Profit
Sharing |
Manufacturing |
24.2% |
28.5% |
42.0% |
Source: Treasury Inspector General for Tax
Administration analysis of Return Inventory and
Classification System data.
Contributing to this improvement may be the use of a focused-examination
approach adopted during Fiscal Year 2006.
In the focused-examination
approach, the emphasis is on evaluating the overall compliance level of the
plan using a number of specific factors, including an assessment of the
plan’s system of internal controls. The intent of focused examinations is to take
advantage of known areas of noncompliance by prioritizing several issues before
the examination begins. These issues are
selected based upon either historical data or other meaningful factors.
While having a lower change rate than special project, abusive transaction, and referral examinations, risk-based examinations protect taxpayers’ retirement funds by providing examination coverage to areas that have been historically noncompliant. This will ensure resources are focused on high-priority areas each year.
Other types of
examinations
The number of examinations selected for other reasons has increased due
to the hiring of examiners needing experience with less complicated issues. As with many IRS functions, the Employee
Plans function has hired new staff to conduct examinations. Training cases are assigned to newer staff as
they complete formal classroom training.
The volume of training cases more than tripled between Fiscal Years
2009 and 2010, accounting for over 8 percent of all completed Employee Plans function
examinations in Fiscal Year 2010.
These examinations provide a means for newer staff to begin working
actual cases as part of developing their skills to complete more complex
examinations in the future.
In addition, examiners from the Employee Plans function also assist
staff from other operating divisions who discover potential compliance issues
in the course of their duties. Examinations
worked in conjunction with other IRS functions accounted for less than 1 percent
of all Employee Plans function examination activity from Fiscal Years 2006 to
2010 and provide a means for ensuring that compliance issues, which may not
otherwise be identified, are considered for examination. Figure 7 provides more detailed information.
Figure 7: Training Cases and Examinations
Worked With Other IRS Functions (Fiscal Years 2006–2010)
|
Fiscal Year |
Training Cases |
Cases Worked With Other IRS Functions |
||||
|
Total Closures |
Percent of All Examinations |
Change Rate |
Total Closures |
Percent of All Examinations |
Change Rate |
|
|
2006 |
552 |
7.2% |
57.1% |
62 |
0.8% |
28.9% |
|
2007 |
486 |
6.1% |
71.6% |
53 |
0.7% |
50.9% |
|
2008 |
399 |
5.4% |
73.4% |
15 |
0.2% |
60.0% |
|
2009 |
284 |
4.1% |
77.5% |
33 |
0.5% |
42.4% |
|
2010 |
893 |
8.3% |
62.7% |
24 |
0.2% |
29.1% |
Source: Audit Information Management System Reports for Fiscal Years 2006 to 2010.
Appendix I
Detailed Objective, Scope, and Methodology
The overall objective of this review was to determine whether the Employee Plans
function’s processes for selecting examination cases allow for emerging
issues to be considered and take into account the risk of noncompliance for the
retirement plan universe. To accomplish this objective, we:
I.
Analyzed
the Employee Plans function’s market-segment and risk-based approaches to
determine whether areas of noncompliance were effectively being identified.
A. Determined whether the results used to
summarize each market segment and create the risk-based approach included
sufficient information to conclude that the results of the risk analysis were
reliable.
B.
Determined whether processes for validating
the market-segment and risk-based approaches were sufficient to ensure that the
risk-assessment process was appropriately identifying productive sources of
examinations.
C.
Determined whether the Employee Plans
function was sufficiently updating the market-segment and refining the
risk-based approaches to be consistent with current trends in retirement plans.
D. Analyzed the results of risk-based
examinations to ensure the market-segment and risk-based approaches are a useful
tool for identifying areas of noncompliance and selecting returns for
examination including:
1.
The percentage of examination workload.
2.
The percentage of closed examinations that
resulted in a change to the return.
3.
The average amount of additional assessments
for closed examinations.
4.
A comparison of risk-based examinations to
other sources of examinations and assessing whether the source had been
prioritized appropriately.
II.
Determined
whether the Employee Plans function’s processes ensured that retirement plans
identified as a special project were being appropriately considered and
evaluated for examination.
A. Determined whether the Employee Plans
function was sufficiently identifying special projects to address the current
retirement-plan universe, e.g., retirement plans that are not required to file
Form 5500.
B.
Determined whether the Employee Plans
function was proactively acting on current economic and retirement plan issues
by identifying issues as a special project.
C.
Analyzed the results of special-project
examinations to ensure those examinations are a useful tool for identifying
areas of noncompliance and selecting returns for examination including:
1.
The
percentage of examination workload.
2.
The percentage of closed examinations that
resulted in a change to the return.
3.
The average amount of additional assessments
for closed examinations.
III.
Determined
whether the Employee Plans function’s processes ensured that retirement plans
identified by referral (including cases from the Employee Plans Compliance
Unit) were being appropriately considered and evaluated for examination.
A. Determined whether corrective actions taken as
a result of one of our previous audits ensured that potentially productive
referrals were being timely selected and examined.
B.
Analyzed the results of the referral program
to ensure it was a useful tool for identifying areas of noncompliance and
selecting returns for examination including:
1.
The percentage of examination workload.
2.
The percentage of closed examinations that
resulted in a change to the return.
3.
The average amount of additional assessments
for closed examinations.
IV.
Determined
whether the Employee Plans function was selecting workload for examination
using methods other than the risk-based approach, special projects, abusive
transactions, and referrals.
A. Determined the volume of workload that was
selected for examination by other sources.
B.
Determined the reasons for using resources in
this manner (e.g., training, insufficient workload for a geographic location,
insufficient workload for a certain grade level, etc.).
C.
Analyzed the results of selecting workload in
this manner to ensure methods other than the risk-based approach are a useful
tool for identifying areas of noncompliance and selecting returns for
examination including:
1.
The
percentage of examination workload.
2.
The percentage of closed examinations that
resulted in a change to the return.
3.
The average
amount of additional assessments for closed examinations.
Internal controls methodology
Internal controls relate to management’s plans, methods, and procedures used to meet their mission, goals, and objectives. Internal controls include the processes and procedures for planning, organizing, directing, and controlling program operations. They include the systems for measuring, reporting, and monitoring program performance. We determined the following internal controls were relevant to our audit objective: the IRS Employee Plans function’s policies, procedures, and practices for identifying and selecting retirement plans for examination to determine if they are in compliance with all applicable laws and regulations. We evaluated these controls by interviewing management, and reviewing examination results and data related to ongoing and completed examination activities. We also reviewed IRS data publications and Employee Plans function examination operation information. We relied on information accumulated by the IRS and the Employee Plans function in established reports and did not verify its accuracy.
Appendix II
Major Contributors to This Report
Nancy A. Nakamura, Assistant Inspector General for Audit (Management
Services and Exempt Organizations)
Troy D. Paterson, Director
James V. Westcott, Audit Manager
Steve T. Myers, Lead Auditor
Melinda H. Dowdy, Auditor
Michael A. McGovern, Auditor
Appendix III
Commissioner C
Office of the Commissioner – Attn: Chief of Staff C
Deputy Commissioner for Services and Enforcement SE
Deputy Commissioner, Tax Exempt and Government Entities Division SE:T
Director, Employee Plans, Tax Exempt and Government Entities Division SE:T:EP
Chief Counsel CC
National Taxpayer Advocate TA
Director, Office of Legislative Affairs CL:LA
Director, Office of Program Evaluation and Risk Analysis RAS:O
Office of Internal Control OS:CFO:CPIC:IC
Audit Liaison: Director, Communications and Liaison, Tax Exempt and Government Entities Division SE:T:CL
Appendix IV
Treasury Inspector General for Tax Administration Audits
Related to the Employee Plans Function’s Examination Selection Methods
Over
the past 9 years, we have conducted many audits of the Employee Plans
function’s programs and processes. The
following reports provide a chronology showing how the Employee Plans
examination-selection methods have changed over time.
·
Fiscal Year 2002 – In Fiscal Year 2002, we first
reviewed the Employee Plans function’s methods for selecting examinations. At the time, we determined that not all
examinations selected for audit were designed to focus on areas representing
the greatest risk of
noncompliance. In response, the Employee
Plans function stated that it intended to develop a Risk-Assessment Program to
ensure that returns selected for examination have a high probability of
noncompliance.[14]
·
Fiscal Year 2003 – We reviewed the Employee Plans
function’s progress and noted that it had implemented a Risk-Assessment Program
that categorized plans into 20 industry segments and 11 plan types within each
industry segment, for a total of 220 distinct market segments. We also determined the Risk-Assessment
Program established priorities for selecting examinations in each of the market
segments. However, validating data in
all market segments would require a significant amount of time; therefore, we
recommended a comprehensive, long-term plan to ensure resources are focused on
the highest priority areas each year.[15]
·
Fiscal Year 2004 – We conducted a review of the
Tax Exempt and Government Entities Division’s abusive transaction program and
determined that Division management had recently begun to develop a Division-wide
program to address abusive transactions within its customer segments. We recommended the Tax Exempt and Government
Entities Division develop some common processes to identify and reduce abusive
transactions within its customer base.
We also determined the Employee Plans function planned to establish a
Compliance Unit in Fiscal Year 2005 to perform analysis to identify abusive
scheme trends.[16]
·
Fiscal Year 2007 – We reviewed the Employee Plans
function’s processing of referrals and determined that referrals were highly productive
examinations. During the audit, the
Employee Plans function changed its workload-selection methods to ensure
referrals were distributed as part of the regular workload of Employee Plans
Examination function groups, instead of being considered discretionary work.[17]
·
Fiscal Year 2010 – We identified retirement plan
trends based on a wide range of statistical indicators. However, we were not able to provide
information about retirement plans that are not required to file a Form 5500
such as churches and government agencies.
We determined the number and types of plans had increased dramatically
over the past 30 years. We also
determined that the trends reflected in our report could dramatically change in
the future given the instability in investments in recent years, the resulting
impact on retirement plans, and legislative changes being considered by
Congress.[18]
[1]
Pub. L. No. 93-406, 88 Stat. 829 (codified as amended in
scattered sections of 5 U.S.C., 18 U.S.C., 26 U.S.C.,
29 U.S.C, and 42 U.S.C.).
[2] The plan document details how the plan operates and outlines plan requirements.
[3] The Employee Plans function Market Segment Framework categorizes the retirement plan universe by type of business (e.g., manufacturing) and type of retirement plan (e.g., profit sharing).
[4] Significant noncompliance for a market segment signifies that 30 percent or more of all returns examined from the segment resulted in a change to the Form 5500 return or the retirement plan document.
[5] “Most
productive examinations” are those which result in identifying retirement plans
that are noncompliant with applicable laws and regulations.
[6] See Appendix IV for details of our past audit work concerning the Employee Plans function’s examination selection methods.
[7] The Employee Plans function’s market segment approach involved completing examinations in segments deemed most likely to be noncompliant and identifying baseline compliance levels for those segments.
[8] Percentage may not equal 100 percent due to rounding.
[9] The Form 5500 instructions outline plans that are not required to file Form 5500. These include governmental plans, certain church plans, and selected plans having only one participant.
[10] While examinations are primarily geared toward determining whether retirement plans comply with the Internal Revenue Code provisions, assessments are another indicator of whether the Employee Plans function is identifying transactions or events that are not consistent with retirement plans’ tax-exempt status.
[11] For Fiscal Years 2009 and 2010, we excluded 4 plans that had 17 large assessments, which exceeded $2 million for each assessment. These 17 assessments accounted for 93 percent of the total for this 2-year period.
[12] Baseline examinations refer to the Employee Plans function’s initial efforts to determine the percentage of a given market-segment’s population that was noncompliant.
[13] Historical rate is based on information from the 1990s. This rate was computed by dividing the number of completed examinations that involved a change to the return by the total number of completed examinations.
[14] Additional Improvements Will Better Focus the Employee Plans Function’s Examinations Workplan on Areas That Identify and Correct Noncompliance (Reference Number 2002-10-143, dated August 16, 2002).
[15]
Clarifying
Goals and Refining Processes Would Improve the Employee Plans Risk Assessment
Program (Reference Number
2003-10-200, dated September 26, 2003).
[16] The Tax Exempt and Government Entities Division Strategy for Abusive Tax Avoidance Transactions Needs Further Development (Reference Number 2004-10-190, dated September 29, 2004).
[17] Employee Plans Noncompliance Referrals Are Productive Sources of Work, but Processing Controls Need to Be Improved (Reference Number 2007-10-185, dated September 24, 2007).
[18] Statistical Trends in Retirement Plans (Reference Number 2010-10-097, dated August 9, 2010).