You may not think of your retirement plan as ‘illegal,’ however, the IRS views it that way if a plan is out of compliance. And, the IRS is getting better at identifying out-of-compliance employee benefit plans. To be in compliance, a plan must:
– Operate under the provisions of the plan document
– Make timely contributions to the plan
– Show proof of properly classified assets that satisfy liabilities
The Employee Plans function of the IRS uses a methodology to target plans for examinations. In an effort to protect the financial investments of plan participants, the Employee Plans function is able to predict emerging issues in plans that can put a plan in jeopardy of being able to fulfill its financial obligations. The methodology is partly based on knowledge of market segments that tend toward non-compliance. In addition, the IRS sources examinations from special projects, using information from changes to the Form 5500, legislative changes, and other available research. The Employee Plans function also selects plans that come from IRS-wide information sources about fraudulent tax schemes, and that come from referrals. If the IRS finds a plan is currently or has the potential to be out of compliance, the IRS will work with plan administrators to correct the examination issues. For more information about the research from the Treasury Inspector General for Tax Administration, view the full report.