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Highlights

The Internal Revenue Service (IRS) studied 401(k) plan compliance with Internal Revenue Code requirements for tax-qualified plans. GAO found that IRS's estimates of noncompliance were inaccurate. The study, which audited a sample of 401(k) plans, did not provide information on the severity of the compliance violations identified and did not determine the number of plan participants or the amount of assets associated with noncompliance errors. Only 27 of the 73 study questions identified as compliance indicators conclusively demonstrated whether a plan was compliant or not. Consequently, the 44 percent reported to have one or more instances of noncompliance is at best an upper limit on the extent of noncompliance found. IRS has chosen specific types of private pension plans to study in a manner similar to the one conducted on 401(k) pension plans. The data that IRS collects will be analyzed to determine the prevalence and types of noncompliance among the plans studied.

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Recommendations

Recommendations for Executive Action

Agency Affected Recommendation Status
Internal Revenue Service 1. For all future compliance studies, the Commissioner of IRS should ensure that the IRS pretest compliance study questionnaires to obtain information on the usefulness and accuracy of the answers in achieving IRS's research objective.
Closed - Implemented
IRS created a new compliance questionnaire and pre-tested it in a pilot class designed to train auditors on how to conduct IRC 401(k) examinations, and to test automated tools for collecting and documenting study data. IRS was able to edit and refine the compliance questionnaire based on the results of the pre-test. The refined questionnaire will be used in future training and is available for agents to use during the next compliance study, projected for late fiscal year (FY) 2004 and FY 2005. IRS officials stated that they will continue to pre-test compliance questionnaires across the board for all future studies.
Internal Revenue Service 2. For all future compliance studies, the Commissioner of IRS should ensure that the IRS provide uniform and comprehensive training to examiners who participate in compliance studies, so that they will know what information is needed to answer the study questions and can collect this information consistently and accurately.
Closed - Implemented
IRS has developed a 401(k) Examination Guide that includes instruction on the use and completion of electronic work papers and compliance questionnaire checksheets. Both of these are used to capture examination results. IRS has also developed comprehensive training to ensure consistency in examinations and accuracy in collection and recording of information using checksheets. This training is ready to be rolled-out when GAO implements the next compliance study, projected for late fiscal year (FY) 2004 and FY 2005.
Internal Revenue Service 3. For all future compliance studies, the Commissioner of IRS should ensure that the IRS maintain sufficient written or electronic documentation to enable it to validate and verify the results of compliance studies with evidence; this would allow IRS to explain the methods used to analyze study data and arrive at findings.
Closed - Implemented
IRS is maintaining comprehensive examination results on its Returns Inventory and classification System database that will enable it to validate results of compliance studies. IRS is also keeping the electronic workpapers to validate study results.

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