Comments on OnSite Audits

February 5, 2007

Ms. Betty McClernan
Acting Director of Examinations
Internal Revenue Service TE:GE
31 Hopkins Plaza Room 1450
SE:T:EP:E
Baltimore, MD 21201

Dear Ms. McClernan:

These comments are made on behalf of the College of Pension Actuaries (COPA). COPA is a group existing primarily to serve the professional needs of enrolled actuaries. Membership in COPA is open to any Enrolled Actuary who is either actively enrolled or retired in good standing. These comments are made by a committee formed by COPA for the sole purpose of commenting on this issue.

We are concerned about pronouncements from the Internal Revenue Service about the need for on-site audits of pension plans. We believe that this requirement causes unnecessary expenses and hardships for our clients, and serves no valid purposes.

Most of our members, while actuaries, also serve as third party administrators (TPA) to all types of pension plans. Most of the plan sponsors we represent are small to mid-size employers. Our clients are too small to have HR departments, and essentially rely on the advice of the TPA for most administrative issues. In our role as TPA (and actuary where applicable) we maintain all of the plan records for our clients. While our clients retain copies of the end-product of our work (copies of 5500 forms etc.), the detailed documents and backup records are almost entirely retained at our offices. For the majority of our clients, all recordkeeping and administrative duties are handled by the TPA.

Traditionally when a plan has been signaled for audit, practitioners have requested that the audit be scheduled at their offices, and typically this request has been met. These requests are made because conducting the audit at the site of the TPA is the most efficient process for the client, and for the agent. We have the plan records; we have the knowledge of how the plans are administered; and we want to minimize the expense of the audit to our clients. We are dismayed to hear that the Service is now taking a default position that the audit must be on-site. When the Service insists on an on-site audit, this creates a significant hardship for our clients:

. They have little knowledge about the details of the operation of the plan and as such they are not comfortable speaking to an IRS agent on their own. They therefore require the TPA to be on-site for the period of the audit. This results in a significant expense to them that they do not have to pay if we have an IRS agent sitting in our own offices, because we do not have to devote ourselves exclusively to the audit when it is held in our offices.

. In many cases the TPA or actuary is not located in the same city as the plan sponsor. Our members serve many clients in different locations. In this situation we have historically requested that the audit be transferred to the IRS office in our location so at to maintain the most efficient process. Having the audit on-site, while we maintain the plan records in our offices, causes us to have to travel to the client’s location with the records. This subjects our clients to the expense of our travel and additional time out of our offices, which is a significant additional expense that would not be billed if the audit were held at our location.

. Our clients are not large businesses with conference rooms and spare offices. They are small manufacturing firms; mom and pop operations; and small businesses with little extra space. They usually do not have the space to accommodate an IRS reviewer and the TPA for the audit. Not only does this make it difficult for the reviewer to conduct the audit, but it also raises privacy issues, given the fact that the reviewer might have to conduct the audit in an open area where confidential information could not be effectively protected.

We also do not understand what is accomplished by the on-site audit. One argument we have heard from the Service is that a walk-through of the client’s facility provides the agent with information about the number of their employees. The reality is that this is extremely limited. Our clients often maintain multiple employee shifts and have different locations for different aspects of their operation. Only a review of their records establishes the number of employees. Another argument is that being on-site allows the agent to assess the client’s operation of the plan. But as described previously, our clients delegate this responsibility in full to the TPA.

We also want to stress that a client is entitled by law to retain someone to represent them before the Service. They are not required to represent themselves in an audit. Insisting on an on-site audit appears to circumvent the client’s ability to have someone else represent them.

We urge the Service to continue to hold audits at the location of the TPA where requested. It is the most efficient process for our clients and for the agents; it results in the lowest cost to our clients; it accommodates the circumstance where the sponsor and TPA are in different cities; and is consistent with the sponsor’s legal right to have someone represent them.

The principal drafter of this letter was Norman Levinrad, COPA, EA, FSPA, MAAA. Initial questions should be directed to Mr. Levinrad at Summit Benefit & Actuarial Services, Inc.. His phone number is (541) 344-8911 x 311, fax number is (541) 344-9104 and his email address is Norman [at] summitbenefit [dot] com

We thank you for your consideration.

Sincerely,

Norman Levinrad, COPA, EA, FSPA, MAAA