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IRS Enforcement Initiatives: It’s Not Paranoia If They’re Really After You

DWC 04/29/21


The IRS generally takes a methodical approach in determining where to focus its enforcement efforts. When a certain compliance issue reaches the IRS radar screen, they often start by gathering information to understand the heart of the matter and then conduct educational outreach to ensure that plan sponsors understand how to do things the correct way. After taking those steps, they will turn their attention to conducting audits that are focused on those areas of potential non-compliance.

The Service is also usually pretty forthcoming when it comes to communicating not only the issues that have caught their attention but also where they fall in the overall enforcement process. The IRS website currently lists the following 6 “Compliance Strategies” related to retirement plans:

  • Small exempt organizations that sponsor retirement plans,
  • One-participant 401(k) plans,
  • Worker classification,
  • Required minimum distributions in large defined benefit plans,
  • Earned income for self-employed plans, and
  • Participant loans.

Each one includes a note that says, “The treatment stream will be examinations.” In other words, they are the audit stage for each of these issues.

The last three on the this are relatively straight-forward, so the remainder of this post will focus on the first three.

Solo 401(k) Plans

This actually refers to plans that cover only owners and potentially their spouses. The IRS website indicates that they are looking for plan document deficiencies as well as plan operations that do not strictly follow plan provisions.

These types of plans have been an area of concern for the IRS for a number of years, not because they are inherently bad but because they are frequently sold by financial institutions to individual business owners as a DIY type of plan that required little to no maintenance. In fact, it is not uncommon for the business owner to be handed a blank plan document adoption agreement to fill out for themselves without any guidance on what the various provisions mean or require in terms of ongoing compliance.

Worker Classification

This is a new spin on a long-standing issue. For many years, the IRS has been concerned about companies properly classifying workers as either employees or independent contractors. Proper classification impacts everything from tax withholding to the ability to deduct certain expenses to eligibility for benefits.

The IRS website says the focus now is on making sure plans are passing the minimum coverage test. We have to go back to the 1990s to see the potential drive for this one. After Microsoft lost a sizeable lawsuit for excluding workers that were improperly classified as independent contractors, most plan documents now include language that excludes workers they designate as contractors even if it later turns out that designation was incorrect. The catch is that even if they are still excluded from the plan, true employees must still be counted in the minimum coverage test. That means that even with that catch-all “Microsoft” language, it is still critical to ensure workers are properly classified so that the minimum coverage test is performed accurately.

Exempt Organization Plans

Though the reference here is generally to non-profit organizations, it is not limited to just 403(b) plans. It could also include 401(k) plans, defined benefit plans, etc. that are sponsored by non-profit organizations, and the focus is on so called “party-in-interest transactions” as well as “improper transactions between the plan and its participants.”

This initiative is likely driven by the fact that it is common for small non-profits to lean on board members, donors, and/or others with a close personal affiliation with the organization to assist with business-related functions such as offering a retirement plan. Though (usually) not ill-intentioned, this can create a setting that is more prone to accidental prohibited transactions.

The DWC team is here to help with these or any other compliance questions you might have. Whether you want to discuss how these enforcement initiatives might impact you or you’ve already received notification of an impending visit from the IRS, give us a call and we are glad to work through it with you.

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Topics: IRS, DWC, IRS Audit, Solo(k) Plan


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The views expressed in this blog are those of the authors and do not necessarily represent the views of any other person or organization. All content is provided for informational purposes only and is not intended to be tax or legal advice.