The IRS expects to conduct approximately 200 examinations of municipal employers. The exams will get underway after the start of the IRS fiscal year in October. From the employees' perspective, contributions to an ineligible plan should have been taxable when made.
Employers face potential income tax reporting and income tax withholding liability.
IRS speakers have suggested that TVC will be expanded to cover ineligible plan sponsors. These organizations should seriously consider approaching the IRS in Washington, D.C. to enter into a closing agreement, as the costs of correction are likely to be far less than if caught on audit. The IRS is already entertaining a number of these closing agreements. However, after administrative processing in Covington, most applications will be returned to a key district office that has workload capability for technical processing, as EO has insufficient funding to relocate technical employees to the centralized site. Under this arrangement, it is possible that an application from Baltimore will be administratively processed in Covington and technically processed in Los Angeles.