IRS Whistleblower Informs ARA of Change that Could Doom Voluntary Corrections

Driven by an apparent desire to clean up its case backlog, the IRS is planning a shift in procedure that might mean the end of the VCP program and subject a massive number of plans to audit.

 

Word of the dramatic shift in focus was brought to the attention of the American Retirement Association by an anonymous IRS whistleblower. The existence of the forthcoming shift in procedure was confirmed independently.

 

 

Information indicates that in the next couple of weeks procedures in the VCP program will be updated in a manner that will subject substantially more cases to the Examination function within IRS.

 

Essentially, if information requested by the IRS is not sent in by practitioners within a 21-day window, the case will be automatically referred to Examination. What’s more, if the taxpayer withdraws a VCP case, it will be referred to Examination. 

 

Moreover, if the taxpayer misses the 21-day window and the case is referred to Examination, the taxpayer will not be allowed to re-submit the case for consideration under the VCP. If the taxpayer disagrees with how the compliance failure should be corrected, the case will be referred to Examination.

 

These procedures apparently will be automatic, meaning that clearance will not be required to refer a VCP case to Examination. Rather, a decision to NOT refer a VCP case to Examination would have to be requested and approved—a decision that, under the circumstances, seems unlikely to be granted in most cases.

 

Shockingly, the new rules will apply to cases already submitted for VCP consideration, including those that might never have been submitted in the first place had this change in protocol been communicated, such as if a taxpayer was on travel during a 21-day period.

 

The VCP is part of the Employee Plans Compliance Resolution System (EPCRS), which permits sponsors of retirement plans to correct failures and thereby continue to provide their employees with retirement benefits on a tax-favored basis. The program has long been positioned as a voluntary means of providing for timely and efficient correction of errors using IRS-approved methodology, thereby reducing employers’ uncertainty regarding their potential tax liability and participants’ potential tax liability.

 

For at least 30 years, there has been a substantial firewall between the VCP and Examination functions. This is sensible of course. Why would a taxpayer voluntarily submit a retirement plan correction to the program if it would increase the chances of an audit on that very issue?

 

 

Beyond a myopic desire to clear a review backlog, it’s hard to see a positive motivation behind the emphasis on shoveling this kind of review into an audit status, a move that seems destined to undermine the laudable intentions and reality of the VCP program. Indeed, it’s by no means certain that this is the end of such sweeping change in attitude by the IRS. After all, it was just two years ago that the IRS sprang a massive reordering of VCP fees on the industry—a shift that dramatically increased the financial burden on smaller plans. In testimony before Congress in 2018, an IRS official promised a biannual review of this structural fee tsunami. However, to date no such review is evident. All in all, these changes suggest a shift from a collaborative approach in efficiently resolving minor issues to a more draconian emphasis on punishment for small administrative missteps.  
 

 

The VCP guidance itself, Rev. Proc. 2019-19, provides that “except in unusual circumstances, a plan that has been properly submitted under VCP will not be examined while the submission is pending.” Under these new procedures, this strong firewall will be shattered, the ARA observes.

The VCP program, which handles thousands of cases each year, has been an unmitigated success for three decades. It was a model program used both in other parts of the IRS and outside the IRS itself. 

 

Apparently, it has become a victim of its own success, accumulating a backlog of cases that upper management at the IRS has decided to clear without regard to the implications for the evaluations underway, or the longer-term chilling effect it is likely to have on employers interested in resolving minor compliance issues without the time and expense of a full audit. 

 

Practitioners will surely be loath to expose their clients to an audit by a “foot fault” over an arbitrary 21-day period; they surely can be expected to dramatically reduce the number of submissions that would otherwise be helpful to their clients. 

 

That might well “cure” the IRS’ concern about VCP backlog—but at a significant cost to the plans—and the participants they cover.