Publication:   401(k) Advisor

Date/Volume/Issue:  January 2018; Vol. 25, No. 1

Plan Compliance When the Watchdogs Are in the Dog House

Ilene H. Ferenczy, Esq.

You may recall that, in 2013, there was a scandal at the Internal Revenue Service (“IRS”) that related to the evaluation by the IRS of political entities that were applying for tax exempt status.  Ostensibly, the IRS was scrutinizing (and, perhaps, delaying or denying) applications from political organizations with conservative leanings.  The FBI ultimately reported that it found no evidence to warrant any criminal charges in this matter, but the reputation of the IRS was soiled nonetheless.  Lawsuits were ultimately settled by the Trump Administration earlier this year.

The scandal emanated from the Exempt Organizations division, which is part of the Tax Exempt and Governmental Entities (“TEGE”) section of the IRS.  This section also includes the Employee Plans (“EP”) division, which oversees qualified retirement plans.  As a result, any punitive action taken against TEGE has affected the EP staff at the IRS.

No one loves the IRS. Likely, nobody ever loved the IRS.  But, after this scandal, the IRS has had an incredible dry spell in terms of getting support from the Administration and Congress, particularly in the form of its budget.  For example, the Washington Examiner reported on June 17, 2014, that “The Internal Revenue Service is about to get slapped with a harsh payback for messing around with conservative groups … The House Appropriations Committee is set to OK an IRS budget of $10.9 billion, $1.5 billion under President Obama’s request for fiscal year 2015, reducing the agency’s budget to 2008 levels.”  [“House Budget punishes IRS with 15% cut, halts Obamacare enforcement,” by Paul Bedard, Washington Examiner, 6/17/14, at http://www.washingtonexaminer.com/house-budget-punishes-irs-with-15-cut-halts-obamacare-enforcement/article/2549830]  The trend continues; the President’s budget plan for the coming year would cut a further $239 million from the IRS.  [“Trump’s budget plan slices $239 million from IRS, but Treasury overall is spared severe cuts,” by Max Ehrenfreund, Washington Post, 3/16/17, at https://www.washingtonpost.com/business/economy/trumps-budget-plan-slices-239-million-from-irs-but-treasury-overall-is-spared-severe-cuts/2017/03/15/d646be30-09ac-11e7-b77c-0047d15a24e0_story.html?utm_term=.9f29ceb9033f]

The impact of these budget cuts has been felt throughout the IRS.  The New York Times noted in its article on the President’s proposed budget that the agency has decreased the number of returns audited to its lowest level since 2004, reduced staffing by 30 percent, and cut the number of criminal investigations initiated.  [“Under Trump, an Already Depleted IRS Could Face Deep Cuts,” by Alan Rappeport, New York Times, 3/2/17, at https://www.nytimes.com/2017/03/02/us/politics/trump-mnuchin-irs.html?_r=0]

Ignoring for purposes of this article the impact on the general tax administration at the IRS, let’s focus our attention on the changes in the relationship of the IRS to the retirement plan administration community over this period of time.

Travelling for the moment to yesteryear (circa 2012), we find that there were several elements to the relationship between the IRS and the retirement plan administration community that facilitated the implementation of retirement plans for private industry.  For example, three representatives from the IRS attended the ASPPA Annual Conference, as they had in many prior years, to answer questions submitted in advance from practitioners about the IRS’s interpretation of benefits rules.  This type of session also existed at the Enrolled Actuaries’ meeting and the Society of Actuaries’ meeting, not to mention the ABA meeting.  These meetings offered a forum for discussion of things concerning the retirement plan public, and an insight into the way the IRS considers a wide variety of issues.  They also permitted the various participants from the government to meet with representatives of the public, which facilitated other dialogues that led to a significant level of cooperation between the regulators and practitioners to achieve the oversight the government required, while permitting the reasonable creation and maintenance of retirement plans for the public good.

Five years ago, the Employee Plans (“EP”) people at the IRS had a service-orientated approach, with a focus on providing plan sponsors and practitioners with access to decision-makers and knowledgeable specialists at the IRS.  If you had a question, you were encouraged to call and get some insight, particularly in the areas of plan corrections.  There were even toll-free numbers where you could call to ask technical questions, which would be answered by the IRS to the extent possible.  The IRS called taxpayers “customers” and discussed their desire to offer good service.

The IRS had a vibrant system of preapproving plan documents offered by organizations to practitioners for use by the clients, as well as the favorable determination letter program under which individualized plans could obtain reassurance that they were in conformance with the very complex web of documentation compliance.

No, not everything was rosy.  The IRS took some positions that practitioners hated, and continuously increased the level of complexity of the rules surrounding retirement plans.  But, there was a general understanding that retirement plans are good things and that it benefited everyone to make coloring within the lines (or effectively erasing crayon marks that went outside the safe zone – perhaps carrying my analogy too far) achievable.

Fast forward to the present.  We understand that the EP Division suffers not only from a drastically reduced budget, but also from a lack of personnel.  Hiring new people or promoting experienced people into positions abandoned by retiring executives has been made nearly impossible by the budget reductions.  As a result, personnel is moved around from other parts of TEGE into EP, creating a “blind leading the blind” result that frustrates plan sponsors and practitioners.  In addition, in place of the focus on customer service and congenial cooperation between the IRS and the public, we now have a focus on cost savings and the movement of more and more of the burden of maintaining the private retirement system to the public.  Here is a sampling of the changes we have seen, much to the detriment of our industry:

• Several of the people at the highest levels of the EP Division are not experienced in retirement plans, creating a vacuum of legal understanding in the area. Decisions are, therefore, made with very little appreciation of the havoc they wreak on the public.
• Programs that have been essential to the proper administration of retirement plans are no longer available to the public, including (of course) the decimation of the favorable determination letter program and the availability of taxpayer help lines to call with questions.
• There is no budget or willingness to have IRS personnel interact with the public, so the numbers of governmental speakers at conferences have reduced to a mere trickle, and the “question and answer” sessions are no longer permitted.
• IRS personnel have been instructed not to answer questions on the telephone put to them by practitioners unless they relate to a specific matter before the IRS employee.
• The Voluntary Compliance Program, which permits practitioners to submit errors for approved corrections and the retention of the tax-favored status of the retirement plan, has ground to a near standstill. The IRS acknowledgement letters that follow a filing (note: that are pre-filled in by the practitioner, so that all the IRS needs to do is to stamp the acknowledgement, stuff the envelope, and mail), which used to be sent within days, now commonly take months.  Actual reviews of the filings are taking nearly a year.
• Executives are commonly “acting” heads of their departments, as they lack whatever specific qualifications they need to be permanent (and cannot obtain those qualifications because the classes and certification programs within the IRS have been cut). As a result, nothing is permanent, and no consistency of administration is to be found.
• We understand that in recent days, EP upper management “shuffled” area managers around so that few or none are now located at the office they supervise. This move attenuates good communicates even further, and will likely require more of the division’s budget to go to travel expenses than would have had the managers remained housed with their departments.  Not to mention the fact that it disrupts the proper flow of work at those offices, where new managers will need to get “up to speed” on pending cases previously overseen by their colleagues.

There is some good news.  In the last year or so, the IRS has issued several pieces of guidance, commonly in a “soft” form, such as memoranda, that have eased some of the administrative burdens of plans.  Such guidance has made safe harbor plans easier to administer, given plan administrators an alternate route to hardship distribution recordkeeping, and clarified a long-standing question about the proper determination of maximum participant loans.  We encourage the IRS to continue this practice, as it certainty goes a long way to helping us do our jobs.  Having the IRS reevaluate positions it has taken in the past that do nothing to further the formation or the regulation of retirement plans, and not incidentally increase the IRS’s enforcement burden, is a great way smarten the process and save money.

While I appreciate that the IRS is in an untenable position due to its reduced budget, I can’t help but think that it is a time for the IRS to cooperate more fully with the public, rather than less.  If practitioners could communicate well with the EP Division, they could help bring about the results that are desired.  We can only beg those at the highest level of TEGE and EP to consider ways to be fiscally responsible, while at the same time, not cutting off practitioners and plan sponsors at the knees.