IRS Makes Employers’ Internal Controls a Priority in Employee Plan Audits


For more than a decade, the Internal Revenue Service has been refining its approach to examining tax-qualified retirement plans, most recently by focusing on internal controls, according to BNA interviews with attorneys and auditors who help employers maintain their plans’ tax-qualified status.

Internal controls are the documented practices and procedures that prevent errors from occurring or that quickly flag errors before the errors have large financial consequences. IRS recognizes their role in keeping plans compliant with the dozens of tax code rules that apply to plan sponsors.

‘‘Clearly IRS has moved to the forefront their focus on specific and tangible internal controls, and that means they look for proof or evidence of actual checks and balances,’’ Thomas G. Schendt, a partner at Alston & Bird in Washington, told BNA.

Practitioners need to understand that, ‘‘as the emphasis on internal controls is being implemented by IRS, so follows the emphasis on proof or retention of records and documents that prove the internal controls have been implemented,’’ Schendt said.

For example, if a plan administrator says in response to an agency query that a third party administrator was responsible for sending out safe harbor notices three years ago, the plan administrator must be able to prove that the notices were sent out, he said.

‘‘It is not just about having internal controls but about proof that they have been implemented,’’ Schendt said. Certain notices, enrollment kits, election forms, and other disclosure information should be retained as evidence for when IRS asks for proof of internal controls, he said.

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