TIGTA Finds IRS Examinations Are Adversely Affected By Information Dropped from Electronic Form 5500 Filings

Prior to January 2010, the DOL manually processed Form 5500 paper returns and schedules. Beginning in January 2010, the DOL began using a new system called EFAST 2 to process Form 5500 filings electronically. Because the Code does not require certain filers to provide information electronically, a variety of IRS information from the old, paper Form 5500 is no longer reported on the new, electronic Form 5500. As a result, the Service’s Employee Plans unit asked the Treasury Inspector General for Tax Administration (TIGTA) to review whether the ability of the Employee Plans division to achieve its tax administration responsibilities has been affected by the reduction in information gathered from employer-sponsored retirement plan annual filings. TIGTA issued its final report, The Employee Plans Function Should Continue Its Efforts to Obtain Needed Retirement Plan Information, a few weeks ago.

The tax-related information no longer required to be reported on Form 5500 is expansive and includes, for example, coverage information previously included on Schedule T, trustee information previously included on Schedule P, and ESOP information previously included on Schedule E. The TIGTA report provides a full list, by schedule and line item, of previously required information that has been dropped from EFAST 2 Form 5500 submissions.

The report is interesting for a number of reasons. First, as reported here and elsewhere, TIGTA previously determined that the IRS had improved its performance in plan examinations over the past few years. This latest TIGTA report, however, indicates that the loss of IRS information from the annual Form 5500 series returns may negate those improvements. In particular, the lack of information may adversely affect Employee Plans’ ability to select noncompliant plans for examination. That would negatively affect both plan sponsors and Employee Plans, because compliant plans may be subject to needless examination more often than in recent years and Employee Plans would deploy its limited resources in conducting such needless examinations. Because the electronic filing system is new, those plans filed under EFAST 2 are just entering the exam process and TIGTA could not fully quantify the effect.

Second, the IRS is going to take action to restore the required filing of information no longer reported. It will, however, take time for any changes to come about. Indeed, the TIGTA report notes that the IRS originally agreed to temporarily relieve filers from reporting certain information as part of the annual filings with the understanding that the IRS would make changes to the Form 5500 series in Fiscal Year 2011, but these proposed changes have been delayed until at least Fiscal Year 2013. Thus, it appears that the current form of annual report will remain in place for at least a few more years.

Finally, the report identifies numerous concerns raised by Employee Plans personnel regarding the impact on its functions of no longer being able to obtain the information to which it previously had access. For example, IRS personnel indicate that it will adversely affect their ability to identify abusive tax avoidance transactions and noncompliance. The lack of information will also affect the Service’s ability to score returns for difficulty, which ensures that examiners with the appropriate amount of experience work on a case.

It is fair to assume that the IRS will work hard to restore reporting of this information via electronic filing, but it may take several years for this to happen. In the meantime, the reporting obligations will remain the same and we may see an uptick in potentially needless examinations. As of yet the IRS has not sought to have the information filed separately in paper form, a move which would certainly add to the significant administrative burden involved with maintaining a qualified plan. We do not expect the IRS to resort to paper filings and, thankfully, the TIGTA report clearly cautions that the benefits of obtaining the information should generally outweigh both the cost and any burden imposed on plan sponsors and administrators.