An IRS’s examination of an employer’s plan has always been a bit unnerving for the plan sponsor-so much so, it seems, that many of them put off dealing with their initial notification letter. I think it’s a common experience of many professionals that they often aren’t brought in until the plan sponsors finally are forced to deal with the IRS after the examiner makes that scary call to schedule an on-site visit. The IRS, however, has been often gracious in the past with the extension of response deadlines for their document requests as long as the examiner views the sponsor as acting in good faith-especially once a professional becomes involved in the process.

This is all suddenly changing. With the IRS’s focus on “black belt” business practices, it announced on November 21, 2016 a new process for its retirement plan audits. These rules center on the timing of the “Information Document Requests” (IDR), which are central to an audit.   The IDR is the manner in which the IRS collects the plan and employer information necessary to conduct the audit.

The process has been relatively fluid in the past. The IRS would follow up on its initial notification of an examination with a series of IDRs and a response date. The response date has been, generally,  able to be reasonably negotiated after being initially set, depending on the circumstances of the plan, the employer and the examiner’s own schedule. The examiner has always had some discretion in resetting the deadlines, as they saw fit.

This is now changing, for both the plan sponsor and the examiner.

The initial IDRs will now generally come out with the first audit notification letter, triggering deadlines immediately. That initial letter (and accompanying IDR)  will be followed up by a telephone call from the examiner to review the IDR with the plan sponsor, at which time the plan sponsor is expected to agree to a response date. This will be an interesting call-most plan sponsors won’t have a clue as to whether the items on the IDR are relevant to the issues on the exam. In fact, they are likely just to agree out of a bit of intimidation-including agreeing to the response date. This is all likely to occur without involvement of the professional, as it will come from an unscheduled call.

Once that response date is agreed to, a serious clock starts ticking. If the (now agreed upon) IDR is not timely, or not complete, by the (now agreed upon) deadline, the examiner must decide within 5 days if an extension will be granted.

Only two extensions can now be granted. The examiner may grant the first one, which may be up to 15 days, AND the examiner must send an extension approval letter. The second, 15 day, extension may be granted only with the examiner’s manager’s approval, and an approval letter must be sent.

If all of the information is not received after the second extension, the examiner “will” begin the formal enforcement process, which may quickly result in the issuance of a formal delinquency notice, and eventual issuance of a formal legal summons, with all of the attendant (and unpleasant) legal ramifications.

All through this, by the way, the examiners will have the “option” to maintain an IDR log, which tracks their compliance with these new rules.

These new procedures appear to be aimed at instilling more discipline into the examination process. The problem, as tends to be the problem with many such structured business process improvement efforts, is that-as good as they may appear to the designer on paper-they often leave little room for the actual business experience. Examinations can be difficult; data can be hard to find, subject to interpretation and dispute; people can be hard to find; business conditions can be difficult; and IDRs have been a dynamic tool used throughout the examination process to establish (or even disprove) an examiners position. Discretion and flexibility in the process is necessary, to both reward and to impose accountability.

But the new, strict process is now here. And as difficult as  it will be for plan sponsors,  I can’t image these rules being well received  by IRS examiners, either.