Pension Plans:

IRS Programs for Resolving Deviations From Tax-Exemption Requirements

GGD-00-169: Published: Aug 14, 2000. Publicly Released: Sep 14, 2000.

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Pursuant to a congressional request, GAO reviewed the Internal Revenue Service's (IRS) programs for resolving pension-plan deviations from tax-exemption requirements, focusing on: (1) the frequency and types of pension plan qualification failures that were detected and corrected through IRS audits; (2) the frequency and types of pension plan qualification failures that were identified by pension plan sponsors and reported to IRS for approval of the correction; (3) the sanctions established under IRS' audit program with the compliance fees that could have been imposed if the same qualification failures had been self-reported by the pension plans to IRS; and (4) whether any cost-effective means, other than pension plan audits, have been identified that would detect unreported qualification failures.

GAO noted that: (1) of all IRS fiscal year (FY) 1999 qualification failure case closings, GAO's review showed that of 1,802 affected pension plans: (a) 42 percent experienced plan document failures (i.e., the documents governing plan operations did not comply with tax law requirements); (b) 66 percent experienced at least one operational failure (i.e., the plan did not operate in accord with plan documents); (c) less than 2 percent experienced demographic failures (i.e., the plans had failed certain tests for ensuring that pension benefits were provided in a nondiscriminatory manner); (d) 9 percent had both operational and document failures; and (e) in general, all types and sizes of plans were represented among those with qualification failures; (2) of a random sample of FY 1999 closed audit cases, on average, pension plan sponsors were assessed monetary sanctions that GAO estimated were 10 times greater than the compliance fees that could have been assessed if the plan sponsors had reported the qualification failures to IRS for supervised correction; (3) however, there were substantial differences in this ratio, depending on the type of reporting program available to the plans and the manner in which IRS applied its guidelines for assessing audit sanctions; (4) IRS officials said that, because of concerns expressed by pension groups, they had initiatives under way to ensure consistency among amounts assessed within compliance programs and coordination across compliance programs; (5) the pension experts GAO talked with at IRS and outside of the government generally viewed audits as an integral part of the government's efforts to promote voluntary compliance and preserve pension benefits for the U.S. workforce; and (6) while they did not identify any cost-effective alternatives to replace IRS audits, both IRS and the pension experts thought that enhancements could be made to existing IRS programs.

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