Advisory Committee on Tax Exempt and Government Entities (ACT ...

Improving the Employee Plans Compliance Resolution System: A Roadmap For Greater Compliance• Sanctions Must be Designed to Encourage Plan Sponsors to UtilizeVoluntary ComplianceA sanction imposed under Audit CAP must be higher than whatwould be imposed under voluntary compliance; otherwise, PlanSponsors would have no incentive to voluntarily comply. This lineof reasoning assumes that Plan Sponsors always have fullknowledge of Plan Failures and thus choose between propercorrection of every Plan Failure or leaving the Plan Failureuncorrected in the hopes that their plan will not be audited or thePlan Failure will not be discovered upon audit. In reality, PlanFailures discovered upon audit are often unknown to the PlanSponsor until the time of the audit. The issue of how much higher asanction should be remains elusive.Since a detailed analysis of the actual administration of Audit CAP is not available, and,to our knowledge, the Government Accounting Office has not conducted a review of theprogram, the ACT was unable to determine how close the actual operation of theprogram is to its policy objectives.2. Reasons For Improvement of Audit CAPThe ACT did not find empirical data indicating wide-spread practitioner dissatisfactionwith Audit CAP. Indeed, one might argue that the large number of cases that areresolved within TE/GE indicates just the contrary – widespread satisfaction with thesystem. 88 Additionally, the ACT has no information which suggests the Service is notearnestly and diligently administering the system in a fair and equitable manner.Nevertheless, there is some evidence that some skepticism exists in the practitionercommunity. 89 More importantly, section 1101(b)(5) of the PPA requires that theSecretary of the Treasury:…continue to update and improve the Employee Plan ComplianceResolution System (or any successor program), giving special attentionto…assuring that any…penalty or sanction that is imposed by reason of acompliance failure is not excessive and bears a reasonable relationship tothe nature, extent and severity of the failure. 90In light of the public skepticism, mild though it may be, and, in particular, theCongressional directive, as strong as it is, the ACT believes the current Audit CAPprocedures require improvement. Three aspects of Audit CAP, considered together,create an impression that it is less than balanced. First, Audit CAP is subjective.Specialists are directed to impose a sanction on the Plan Sponsor that will not be88 See Exhibit A.89 BNA Daily Tax Report, Mar. 5, 2007 “IRS Officials Reject Attorney’s Assertions Employee Plans Compliance Less Flexible.”90 PPA § 1101(b)(5).ADVISORY COMMITTEE ON TAX EXEMPT AND GOVERNMENT ENTITIES (ACT) June 11, 2008 39