Retirement plans experienced fraud losses because of weak internal controls and risky investments, the IRS said Feb. 2.
The agency's Employee Plans Compliance Unit audited more than 800 Forms 5500 series that reported fraud losses, and examined the circumstances around the loss, how the plan accounted for that loss, what actions were taken to recover the plan loss and what actions were taken to prevent future losses, the IRS said.
The audit, called the Fraud Project, showed the majority of the results, 68 percent, came from a line entry error in return preparation. Whether the error was made by a handwritten or electronic entry, the most common problem was the fidelity bond amount being entered on a line for a loss caused by fraud or dishonesty, the IRS said.
The audit, one of the first projects by the unit, found that only 13 percent of returns showed an actual fraud loss and 19 percent of the cases involved a system line conversion error, the IRS said.
Some suggestions for establishing strong internal controls include tracing deposits and payments to original documents; having a third party check books and records; reconciling bank, investment and account information regularly; and ensuring payments are sent to correct vendors, the IRS said.
Risky investments can expose plans to additional taxes on prohibited transactions or unrelated business income, the IRS said.
The unit also audited Forms 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, and found errors in reporting taxable distributions.
In the audit, called the Form 1099R-72(t) Project, the unit reviewed Forms 1099, that were marked with early distributions and then checked to see if the individuals reported the taxable distributions and the 10 percent early distribution tax on Form 1040, the IRS said.
The unit found that almost 40 percent of individuals made errors on Form 1040, with most of them not qualifying for an exception to the 10 percent tax on early distributions. The unit asked those individuals to amend their returns to appropriately report the distributions, the IRS said.
The agency is to use the information gathered during the audit to target areas for additional guidance and education, the IRS said.
For more information, see Compensation and Benefits Library's “IRS Guidance: 401(k) Plan Compliance Checklist” chapter.
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