Our tax system rests on voluntary compliance and the assumption that taxpayers will abide by the law. Voluntary compliance is based on taxpayers complying with the law and the use of the audit by the Internal Revenue Service and/or Department of Labor (for retirement plans) is an effective check and tool to encourage it. Voluntary compliance as it pertains to qualified retirement plans means that each plan sponsor must comply with the Internal Revenue Code and ERISA (Employee Retirement Income Security Act of 1974). Audits of qualified retirement plans by the Internal Revenue Service (IRS) or Department of Labor (DOL)can result in substantial penalties if compliance errors are detected. For plans that are so out of compliance, the Internal Revenue Service (IRS) could hit them with disqualification which would disallow prior contribution deductions to the plan sponsor and immediate income to participants in the amount of their account balance. Thankfully, the IRS and DOL have created voluntary compliance programs to encourage voluntary compliance and to encourage plan sponsors to fix problems they discover. These programs offer reduced penalty amounts and if you have a plan error to fix, get it done.
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