IRS Retirement Plan Letter: What to Do Next

If you’re a business owner, the reality is at some point you may receive a letter from the IRS regarding your company’s retirement plan (e.g. 401(k) Plan). Worse yet, the letter may even reflect that your company is being assessed a sizeable penalty due to some sort of compliance failure.

Don’t worry. You have fundamental rights when interacting with the IRS. In fact, listed below are some simple but important actions you can take to actively face this problem head on and return to what’s really important: growing your business.

What to Do When You Receive an IRS Letter About Your Retirement Plan

Step 1: Read the Entire Letter Carefully

Most letters deal with a specific issue and provide specific instructions on what to do. Read it several times to make sure you understand what they are asking for and what your next steps should be. The IRS maintains a lookup for its correspondence at Understanding your IRS notice or letter, searchable by the CP or LTR number in the top right corner.

Step 2: Compare It With Your Plan’s Form 5500

If a letter indicates a changed or corrected tax return, you should review the information and compare it with your original return and make sure to note any changes or differences between the two documents. For a retirement plan that return is generally the Form 5500, and every filing since 2009 is available to download. The IRS also publishes what its filing notices for Forms 5500, 5500-SF, 5500-EZ and 5558 mean and what each one is asking for.

Step 3: Respond if You Disagree

Respond to the letter by addressing the part in which you do not agree.
Mail a letter explaining why you disagree.
Mail your response to the address listed at the bottom of the letter.
Include information and documents for the IRS to consider that supports your response.
And, allow at least 30 days for a response from the IRS.

Step 4: Reply if You Agree

There’s no need to contact the IRS. When a specific response date is in the letter there are two main reasons why you should respond by that date:

To minimize additional interest and penalty charges.
To preserve your appeal rights.

Step 5: Contact the IRS if Necessary

For most letters, there’s no need to call the IRS or make an appointment at a taxpayer assistance center. If a call seems necessary, you can call the phone number in the upper right-hand corner of the letter. Make sure you have a copy of the tax return and letter on hand when calling.

Step 6: Contact Leading Retirement Solutions

We regularly assist clients by recommending how to respond the IRS as well as prepare responses on your behalf. We understand your rights as a business owner and will help you navigate any compliance issues you may be facing. Where a failure has already occurred, our consulting and correction services cover the formal routes available, and our guide to what an IRS or DOL retirement plan notice means explains the most common letters. Contact our team to talk it through.

Step 7: Keep the Letter

In fact, it’s just smart to keep copies of any IRS letters or notices you receive with your tax records in case anything pops up in the future. If the matter ends in a formal correction, our note on what follows an IRS compliance statement covers what to expect.

Know Your Rights as a Taxpayer

Furthermore, it would be a good idea to also become familiar with your Taxpayer Bill of Rights. Among other things, these rights dictate that letters from the IRS must include:

Details about what the taxpayer owes, such as tax, interest and penalties.
An explanation about why the taxpayer owes the taxes.
Specific reasons about why the IRS may have denied a refund claim.

Helpful Resources

IRS, Understanding your IRS notice or letter — search any notice by its CP or LTR number to see what it means.
IRS, Filing notices for Forms 5500, 5500-SF, 5500-EZ and 5558 — what each Form 5500 notice is asking for and the penalty amounts behind it.
IRS, Correcting plan errors — the correction programs available once a failure is identified.
IRS, Voluntary Correction Program — how to correct an operational failure with IRS approval before an audit.
IRS, Taxpayer Bill of Rights — the ten rights that apply to every interaction with the agency.

A federal notice is not the only deadline an employer can be working against. Separately from anything the IRS sends, a growing number of states require employers above a certain size to offer a qualifying retirement plan or enroll their employees in a state-facilitated program, each with its own registration deadline:

Which states have mandatory retirement plans — who is affected and what triggers the requirement.
State retirement mandate map — the current position and deadline for every state.

For more tips and information regarding retirement plans, follow our blog.
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*This article was adapted from a posting by the IRS: What taxpayers can do when a letter arrives.