We are about to enter Audit CAP for errors due to the improper calculation of an employer discretionary contribution. For participants entering during the plan year, we had been using compensation from the entry date through the end of the year (our document provides for full year compensation). This happened over three years with the total missed contributions of around $250k.

Does anyone know how the IRS generates the opening bid for the sanction amount? This is my first trip through Audit CAP. I am wondering how they come up with a sanction range, and also how "negotiable" it really is.

Thanks.

Obviously I don't know what the plan says, and this might be a stretch, but it's possible that an appropriate cure of the operational violation is to reallocate the aggregate discretionary amount actually contributed, rather than having to cough up the additional $250k in contributions (plus earnings). If the employer is already prepared to contribute the $250k, maybe that can serve as leverage in discussions with IRS: i.e., employer will contribute the $250k plus earnings if IRS exacts a low compliance fee; otherwise employer will only undertake the reallocation procedure.

Our only exposure to the audit cap program occurred several years ago and was not a good one. Let me first say that the defect in our client's case involved a document failure, which, operationally as well as monetarily, had no impact on the plan - hopefully they'll show more flexibility when large numbers are involved. The client was slapped with a minimum sanction amount and the IRS made it clear early on that there will be no negotiation (their thorough disregard of the "facts and circumstances" was quite impressive). After much kvetching they decreased the sanction amount slightly, but the end result was still rather ridiculous. Again, maybe they draw a harder line on the small stuff, or maybe they're more lenient on operational failures. Wish I had a better experience to relay. Best of luck and please let us know how things turn out.