First, the bad news. The IRS is launching a full-scale audit program aimed at corporate 401(k) plans.
Now the good news. Sorry, there is none. If the tax man determines that your company's 401(k) is out of compliance, you could wind up owing overdue taxes, back-interest payments, and penalties.
According to Fred Reish, managing partner at Reish & Luftman, a law firm with offices in Los Angeles and Washington, D.C., the IRS has issued its first full-scale set of audit instructions to guide revenue agents through comprehensive 401(k) audits. "It's realistic to expect that smaller businesses will be one of the major targets of those audits, since the majority of 401(k)s are set up in companies with fewer than 100 employees."
If your company gets selected for a full-scale audit, Reish says to expect "a tedious and time-consuming process, where they'll check everything about participation, contributions, and much more." If the audit shows that you're out of compliance, your troubles will worsen as 401(k) contributions get reclassified as taxable income.
What then? "If your company winds up in this situation, there's sometimes room to negotiate a reduced penalty if you can demonstrate that you now intend to comply with the letter of the law," Reish says. To avoid problems, consider hiring a 401(k) expert now to conduct a preliminary audit according to the IRS's guidelines.* * *