There’s an old expression among tax practitioners referring to taxpayers who know there is a potential tax problem, but are willing to take their chances. They’re “playing audit roulette”.

Not a good thing for plan sponsors to do with stepped compliance activities by the Internal Revenue Services and the Department of Labor who have oversight responsibility for the approximately 500,000 401(k) plans covering approximately 50 million employees.

And here’s the latest. Last week the IRS Employee Plans Compliance Unit (EPCU) announced that it will be sending a letter and instructions to 1,200 employers sponsoring 401(k) plans asking them to complete a 46-page 401(k) Compliance Check Questionnaire.

The EPCU will use a secure website to collect responses on the following topics:

  • Demographics
  • Participation
  • Employer and employee contributions
  • Top-heavy and nondiscrimination testing
  • Distributions and plan loans
  • Other plan operations
  • Automatic contribution arrangements
  • Designated Roth features
  • IRS voluntary compliance and correction programs
  • Plan administration

While the IRS indicates that this is not an audit or investigation, it does say that “failure to complete the Questionnaire will result in further enforcement action.”

While the odds of a 401(k) plan sponsor being selected are low, about 417 to 1, plan sponsors should view it as a reminder to periodically review plan operations and take corrective action if necessary. Far better to do so using available Internal Revenue Service and Department of Labor voluntary correction programs before getting caught up in an audit or investigation.