Academic journal article Journal of Accountancy

IRS Penchant for Auditing Small Business Pensions

Academic journal article Journal of Accountancy

IRS Penchant for Auditing Small Business Pensions

Article excerpt

The Internal Revenue Service is always on the lookout for abuses (or what it perceives to be abuses) in our tax system. One area that has caught its attention in recent years has been defined benefit pension plans with five (or fewer) participants.

DEFINED BENEFIT PLANS

Under a defined benefit plan, the amount ultimately received is calculated based on several factors, including the mortality rates of participants, work force turnover, investment return, compensation, disability experience and retirement rates and ages. These factors can only be estimated, and the estimates must be "reasonable." All the factors together determine how much must be contributed to the pension plan each year to reach the ideal amount; this contribution is a deductible expense. If the estimates for some of these factors are low, the contributions needed to reach the benefit amount in a given year will increase and give rise to larger deductions.

SMALL PLAN

EXAMINATIONS

Essentially, the problem perceived by the IRS is as follows: Because plans typically fund their benefits over a shorter time period and have less plan experience to use as a guide, these plans tend to use more conservative estimates (with accompanying higher deductions). The IRS is focusing on plan investment returns and the participants' retirement ages for the years 1986, 1987 and 1988; plans with assumed rates of return less than 8% and retirement ages below 65 during those years will be subject to examination. (This will involve approximately 20,000 plans and $666 million in taxes.)

RESOLUTION OF

EXAMINATIONS

Given the potential penalties and interest (which accumulate while these issues are being resolved), a taxpayer's ultimate liability could be double the amount originally in question. In order to resolve these cases more quickly, the IRS has instituted an Actuarial Resolution Program, which started last July and will extend until March 31, 1992.

How the program works. On completing an audit of a plan in this program, the IRS determines an adjustment and informs the taxpayer. At that point, the case is sent to a resolutions officer who will determine if the taxpayer is eligible for settlement. …

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