A Service-wide Strategy Is Needed to Address Growing
Noncompliance With Individual Retirement Account Contribution and Distribution
Requirements
March 29, 2010
Reference Number: 2010-40-043
This report has cleared the Treasury Inspector General for Tax Administration disclosure review process and information determined to be restricted from public release has been redacted from this document.
Phone Number |
202-622-6500
Email Address | inquiries@tigta.treas.gov
Web Site |
http://www.tigta.gov
March 29, 2010
MEMORANDUM FOR DEPUTY COMMISSIONER FOR SERVICES AND ENFORCEMENT
FROM: Michael R. Phillips /s/ Michael R. Phillips
Deputy Inspector General for Audit
SUBJECT: Final Audit Report – A Service-wide Strategy Is Needed to Address Growing Noncompliance With Individual Retirement Account Contribution and Distribution Requirements (Audit #200940016)
This report presents the results of our review to determine
whether the Internal Revenue Service (IRS) actions to identify and correct
individual excess contributions to Individual Retirement Accounts (IRA) and
nondisbursements of required minimum distributions from IRAs. This review was included in the Treasury
Inspector General for Tax Administration Fiscal Year 2009 Annual Audit Plan and
addresses the major management challenge of Processing Returns and Implementing
Tax Law Changes.
Impact on the Taxpayer
IRAs are a key tax-preferred way for
individuals to save for retirement and are an increasingly important way for
individuals to roll over savings from pension plans. The Investment Company Institute[1]
estimated that assets held in IRAs were $3.6 trillion in 2008 and that IRAs
represented more than 26 percent of total
Synopsis
There are two main
types of IRAs, a traditional IRA and a Roth IRA. Both types allow individuals to contribute up
to $4,000 per year ($5,000 if age 50 or older) and provide tax-preferred ways to
save for retirement.[3] Any
amount contributed to a traditional or Roth IRA for the year that exceeds the
contribution limit, or any amount contributed to a traditional IRA by an individual
who has reached age 70½, is an excess contribution. Generally, if the excess contribution for the
year is not withdrawn by the due date of the tax return (including extensions),
there is a 6 percent excise tax on the amount of excess contribution.
Individual noncompliance with IRA excess contribution and minimum distribution requirements continues to grow since our previous review.[4] Our review of Tax Year (TY) 2006 and TY 2007 IRA Contribution Information (Form 5498) and Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. (Form 1099-R) identified potential revenue losses associated with:
The IRS needs to develop a Service-wide strategy
to address growing noncompliance with IRA excess contribution and minimum
distribution requirements.
Our prior review
concluded that the IRS’ processing procedures for IRAs do not ensure that
individuals are complying with IRA rules.
In our current review, we again found that IRS procedures are inadequate
to identify individuals who make IRA contributions in excess of what the law
allows or individuals who are not taking required minimum distributions. In response to concerns we raised in our prior
audit report, the IRS initiated four studies.[5] To date,
results are available for only one of the IRS’ studies, and these results
confirm what we had previously reported to the IRS in March 2008—individuals
are making excess contributions. Based
on our analyses, we believe the remaining three studies will confirm what we
previously reported—individuals are making excess contributions and individuals
are not taking required minimum distributions.
Apart from the
initiation of the four studies, the IRS has not taken sufficient action to
address the significant revenue losses associated with IRA noncompliance. The IRS should develop a Service-wide
strategy to address growing IRA noncompliance.
Of particular concern is the lack of functional ownership within the IRS
for addressing IRA noncompliance. Based
on our analyses of IRA contributions and required minimum distributions,
noncompliance will likely continue to grow and continue to result in
significant revenue loss. By 2030, the
number of people aged 65 and over is expected to double to about
20 percent of the population, or more than 71 million people. The number of people aged 85 and older will
be the fastest growing segment of the
Recommendation
The Deputy Commissioner for Services and Enforcement should ensure a Service-wide strategy is developed to address retirement provision noncompliance.
Response
IRS management agreed that a Service-wide strategy is warranted. Executives from the Wage and Investment and Tax Exempt and Government Entities Divisions met and agreed to share responsibility for development of this long-term strategy. The strategy will not only address compliance, but will also include plans for outreach and guidance for individual tax payers and employee plan organizations.
IRS management agreed with the outcome measures outlined in Appendix IV, but added that full realization of the potential revenue cited may not be realistic. IRS management’s complete response to the draft report is included as Appendix VIII.
Copies of this report are also being sent to the IRS managers affected by the report recommendation. Please contact me at (202) 622-6510 if you have questions or Michael E. McKenney, Assistant Inspector General for Audit (Returns Processing and Account Services), at (202) 622-5916.
Appendices
Appendix
I – Detailed Objective, Scope, and Methodology
Appendix
II – Major Contributors to This Report
Appendix
III – Report Distribution List
Appendix
IV – Outcome Measures
Appendix
V – Methodology to Compute Estimated Revenue Loss Associated With Excess IRA Contributions
Appendix VI – IRA
Contribution Information (Form 5498)
Appendix VIII
– Management’s Response to the Draft Report
Abbreviations
|
AUR |
Automated Underreporter |
|
IRA |
Individual Retirement Account (also known as
Individual Retirement Arrangement) |
|
IRS |
Internal Revenue Service |
|
NRP |
National Research Program |
|
TIGTA |
Treasury Inspector General for Tax
Administration |
|
TIN |
Taxpayer Identification Number |
|
TY |
Tax Year |
|
|
|
Individual
Retirement Accounts (IRA) are a key tax-preferred way for individuals to save
for retirement and are an increasingly important way for individuals to roll over
savings from pension plans. In addition,
funds put into IRAs can grow faster than a typical investment account since
they are tax deferred. The Investment
Company Institute[7] estimated that assets held in IRAs were $3.6
trillion in 2008 and that IRAs represented more than 26 percent of total United
States (U.S.) retirement assets.[8] Approximately
47.3 million households, or 4 in 10, owned IRAs in mid-2008. Figure 1 provides a breakdown of these 47.3
million
Figure
1: Millions of Households That Own
Individual Retirement Accounts
|
Type of IRA |
Year Created |
Number of |
Percentage of |
|
Traditional IRA |
1974 (Employee Retirement Income Security Act) |
37.5 million |
32.1% |
|
Simplified Employee Pension (SEP) IRA Salary Reduction Simplified Employee Pension (SARSEP)
IRA Savings Incentive Match Plan for Employees (SIMPLE)
IRA |
1978 (Revenue Act) |
10.0 million |
8.6% |
|
Roth IRA |
1997 (Taxpayer Relief Act) |
18.6 million |
15.9% |
|
Any IRA[9] |
|
47.3 million |
40.5% |
Source:
Investment Company Institute, Research Fundamentals, The
Two Main Types of IRAs – Traditional and Roth
There are two main types of IRAs, a
traditional IRA and a Roth IRA. Both
types allow individuals to contribute up to $4,000 per year ($5,000 if age 50
or older) and provide tax-preferred ways of saving for retirement.[10] Any amount
contributed to a traditional or Roth IRA for the year that exceeds the contribution
limit, or any amount contributed to a traditional IRA by an individual who has
reached age 70½, is an excess contribution.
Generally, if the excess contributions for the year are not withdrawn by
the due date of the tax return (including extensions), there is a 6 percent excise
tax on the excess contributions. Specific
characteristics of traditional and Roth IRAs are shown below.
·
Traditional IRA: The
traditional IRA, within certain income limits and other eligibility factors,[11] allows individuals
to deduct the amount of their IRA contribution from their taxable income, thus
adding to their tax deferral benefits. When
an individual reaches age 70½, the individual can no longer contribute to a traditional
IRA and must begin taking required minimum
distributions from a traditional IRA.[12] The required
minimum distribution must be taken by April 1 following the calendar year in
which the individual reaches age 70½ and by December 31 for all subsequent
years. The amount that is required to be
distributed depends on the traditional IRA balance at the end of the preceding
year and the individual’s life expectancy.
These distributions are generally taxed as ordinary income. Any portion of the required minimum
distribution not taken by the individual by the end of the year may be subject
to a 50 percent excise tax.[13]
· Roth IRA: There is no age limit for making contributions to Roth IRAs[14] (i.e., contributions can be made after reaching age 70½). Roth IRA contributions are not tax deductible, but qualified distributions[15] from Roth IRAs are tax free. In addition, there is no age limit as to when distributions must take place, so individuals can accumulate investment earnings tax free for as long as they choose. For example:
An
unmarried individual age 71 with a traditional IRA balance of $26,500 would be
required to take a minimum distribution of $1,000.[16] If distributions are less than the minimum
distribution for the year, the individual is subject to a 50 percent excise tax
on the amount not distributed as required.
In contrast, if this individual owned a Roth IRA, they would not be
required to take a minimum distribution.
However, beneficiaries of either traditional or Roth IRAs are required
to take minimum distributions, and the rules depend on whether the beneficiary
is a surviving spouse, other individual, or an entity, such as a trust or
estate.
While these IRA provisions provide meaningful
benefits to individuals, these same provisions can pose a significant risk for
tax revenue loss to the Federal Government if the information reported to the Internal
Revenue Service (IRS) by IRA account custodians[17] is not used to identify noncompliance with
IRA requirements. For example, if an individual
contributed the annual maximum to one Roth IRA and then improperly contributes the
same amount to a second Roth IRA, the potential amount of tax-free proceeds to
beneficiaries could be $505,365 over 30 years due to the annual compounding of
interest, as shown in Figure 2.
Figure 2:
Potential Impact to Federal Government Revenues
|
Individual With One Unallowable |
$5,000/Yr @ 7% for 10
Years |
$5,000/Yr @ 7% for 20
Years |
$5,000/Yr @ 7% for 30
Years |
Tax-Free Proceeds to
Beneficiaries |
|
Principal Plus Interest |
$73,918 |
$219,326 |
$505,365 |
$505,365 |
|
(Less) Total
Contributions[18] |
-$50,000 |
-$100,000 |
-$150,000 |
|
|
Total Unreported
Interest |
$23,918 |
$119,326 |
$355,365 |
|
Source: Treasury Inspector
General for Tax Administration (TIGTA) computations of compound interest.
In addition, if an individual
had sufficient funds to establish more than one unallowable Roth IRA, the risk
of significant unreported income could be substantially more than the amounts
shown in Figure 2.
Custodial Reporting Requirements
To protect against the risk shown in Figure 2, IRA custodians are required to report IRA contributions to the IRS on IRA Contribution Information (Form 5498)[19] and provide copies to IRA owners (individuals). A separate Form 5498 should be filed for each IRA an individual holds.
Custodians are required to report distributions from IRA accounts on Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.(Form 1099-R).[20] Custodians must also provide the appropriate distribution codes. For example, code 7 for normal distribution, code 4 for death, etc. In addition, IRA custodians are required to submit Forms 5498 and 1099-R to the IRS Information Returns Branch.[21] This branch collects and processes the information returns so they can be used by other IRS functions or programs. Once the information returns are processed, they are posted to the IRS Information Returns Master File.[22] Data on this system may not be available for months because some information returns for the tax year are not due until the middle of the following year.
A Prior TIGTA Audit Identified Individual Noncompliance With IRA Requirements
This audit is a followup to a prior TIGTA report.[23] In our prior review, we reported that individuals were making contributions in excess of the maximum allowable limit and individuals were not taking required minimum distributions. The focus was on the following issues for traditional or Roth IRAs: (1) contributions in excess of the maximum allowable limit of $4,500 for Tax Year (TY) 2005 and (2) required minimum distributions from traditional IRAs. This audit included a review of contributions made in excess of the maximum allowable limit of $5,000 for TY 2006 and $5,000 for TY 2007 and required minimum distributions not taken by individuals for TY 2006 and TY 2007.
This review was performed at the IRS Wage
and Investment Division office in
Noncompliance
With Excess Contribution and Minimum Distribution Requirements Continues to
Grow, Resulting in Significant Revenue Loss
Individual noncompliance with IRA excess contribution and minimum distribution requirements continues to grow since our previous review. Our review of TY 2006 and TY 2007 Forms 5498 and Forms 1099-R identified potential revenue losses associated with:
295,141 individuals improperly making excess
contributions totaling $812,339,722 for TY 2006 and $756,792,044 for TY 2007. We estimate tax revenue losses of $94,150,444
in excise tax and $17,574,276 in income tax for these 2 tax years.
255,498 individuals not taking required minimum
distributions totaling $348,480,200 for TY 2006 and TY 2007. We estimate tax revenue loss of $174,249,074 for
these 2 tax years.
The IRS has initiated studies to confirm what the
TIGTA previously reported, but has not taken actions to address significant
revenue losses associated with IRA noncompliance.
Our prior review
concluded that the IRS’ processing procedures for IRAs do not ensure that individuals
are complying with IRA rules. In
response to concerns we raised in our prior audit report, the IRS initiated four
studies.[24] To
date, results are available for only one of the IRS’ studies and these results confirm
what we had previously reported to the IRS in March 2008—individuals are making excess
contributions. Based on our analyses, we
believe the remaining three studies will confirm what we previously reported—individuals are making excess contributions
and individuals are not taking required minimum distributions.
Apart from the
initiation of these studies, the IRS has not taken sufficient action to address
the significant revenue losses associated with IRA noncompliance.
Individuals continue to make
contributions in excess of maximum limits
In our prior review, we identified 107,129 individuals
who appeared to have exceeded the $4,500 maximum allowable IRA contribution
limit for TY 2005 and did not report excise tax on the excess contributions.[25] We estimated the potential revenue loss
resulting from the excess contributions of more than $6.6 million in unreported
excise tax. We estimated that over 5
years, the potential amount of lost excise tax revenue would be approximately
$33 million. This estimate was based on the probability that these individuals
would continue to make the same excess contributions over the next 5 years.
For this review, to
identify the potential underreported excise tax resulting from excess
contributions, we performed an analysis similar to the concept of the IRS
Automated Underreporter (AUR) Program, which uses third-party reporting
documents (Forms 5498 and Forms 1099-R) to identify potentially noncompliant
individuals. Appendix V details the
specific methodology we used which could be used by the IRS in developing an
IRA compliance initiative.
Excess
contributions by 295,141 individuals in TYs 2006 and 2007 resulted in $235
million in unreported excise tax over 5 years.
Our
review of TY 2006 and TY 2007 IRA contributions showed that noncompliance with the
excess contribution limit has grown significantly. We identified 295,141 individuals who
exceeded the maximum annual limit of $5,000.[26] The
excess contributions for these individuals totaled more than $1.5 billion. We estimate potential revenue loss of more
than $94.1 million in unreported excise tax resulting from the excess contributions for TY 2006 and TY 2007. Figure 3 shows that over 5 years, the
potential amount of lost excise tax revenue totals more than $235 million. Our estimate
is based on the individuals continuing to make the same excess contributions
over the next 5 years.
Figure 3: Potential Revenue Loss From Unreported Excise
Tax
|
Tax Year |
Number of Individuals With Excess IRA Contributions |
Total Excess IRA Contributions |
6% Excise Tax |
|
TY 2006 |
151,165 |
$812,339,722 |
$48,741,723 |
|
TY 2007 |
143,976 |
$756,792,044 |
$45,408,721 |
|
Totals of TYs 2006 and
2007 |
295,141 |
$1,569,131,766 |
$94,150,444[27] |
|
Average for TYs 2006 and 2007 |
147,571 |
$784,565,883 |
$47,075,222 |
|
Potential
Unreported |
737,853 |
$3,922,829,415 |
$235,376,110 |
Source: TIGTA analysis of TYs 2006
and 2007 Forms 5498.
For TY 2006 and TY 2007, IRA contribution limits were generally the smaller of $4,000 ($5,000 if age 50 or older by the end of the year) or taxable compensation. Individuals could contribute to both traditional and Roth IRAs for the same year; however, the total contributions could not exceed the maximum limit. For example, an individual age 50 or older could contribute $3,000 to a Roth IRA and $2,000 to a traditional IRA, or any other combination provided that the total contribution did not exceed $5,000. Contributions that are in excess of the limits and not properly withdrawn are subject to a 6 percent excise tax.
In addition, we estimate potential revenue loss of more than $17.5 million in income tax on unreported interest on the more than $1.5 billion of excess contributions for TY 2006 and TY 2007. Figure 4 shows the potential revenue loss of income tax on unreported interest over the next 5 years using a 4 percent interest rate and a 28 percent tax rate.[28]
Figure 4: Potential Revenue Loss From Unreported
Interest
|
Tax Year |
4% Interest Income on Excess IRA
Contributions |
Revenue Loss Due to Income Tax Avoidance |
|
TY 2006 |
$32,493,589 |
$9,098,205 |
|
TY 2007 |
$30,271,682 |
$8,476,071 |
|
Total for TY 2006 and TY 2007 |
$62,765,271 |
$17,574,276 |
|
Average for TY 2006 and TY 2007 |
$31,382,635 |
$8,787,138 |
|
Potential
Revenue Loss for TYs 2008 to 2012 |
$169,978,476[29] |
$47,593,973[30] |
Source: TIGTA computation of unreported
interest and income tax avoidance.
IRS Actions to Date Have Not Reduced Excess
Contribution Noncompliance
In our prior review, we recommended that the Commissioner,
Wage and Investment Division, develop and implement strategies to bring
noncompliant individuals back into compliance.
To date, no strategies have been developed or implemented to reduce
noncompliance. Instead, to address our
recommendations, the IRS initiated studies to identify cases with IRA
contributions in excess of the limits for TY 2006 and TY 2007. The IRS study for TY 2006 found the same
problem that we previously reported; i.e., individuals are making excess
contributions resulting in significant revenue loss. The results of the TY 2007 study of excess
IRA contributions are not yet available.
However, the IRS advised us that the TY 2007 results are consistent with
the TY 2006 results.
The IRS limited the cases it reviewed as part of its TY 2006 study to the total population of cases in AUR Program inventory that, along with other issues, also included an IRA issue. There were 38,761 of these cases. The IRS calculated lost excise tax revenue of approximately $15.4 million ($397 average per case) in excise tax on the excess contributions. Excess contributions for these 38,761 noncompliant cases totaled $256,619,933. The IRS informed us that the $397 average excise tax per case is below the AUR Program case average. The study also estimated that at least $29.5 million ($764 average per case) to as much as $109.5 million ($2,836 average per case)[31] of income tax revenue was lost due to unreported interest income on the excess Roth IRA contributions for one tax year.[32]
We determined that the IRS incorrectly calculated the
average income tax avoidance per case.
The IRS used the total number of traditional and Roth IRA over-contribution
cases to compute the average. Instead, the
IRS should have only used the number of Roth IRA over-contribution cases to
compute the average. This is because
withdrawals from Roth IRAs are tax free; whereas, withdrawals from traditional
IRAs are subject to income tax. The IRS
agreed an error had been made. Figure 5
provides the recalculated average income tax avoidance per case.
Figure 5: Recalculated
Average Income Tax Avoidance Estimate
|
|
Minimum
(2%) |
Maximum
(6%) |
|
Total Income Tax |
$ 29,519,294 |
$ 109,526,109 |
|
Average Income Tax Avoidance per
Case |
$ 1,413 |
$ 5,241 |
Source: TIGTA analysis of the
IRS AUR Program IRA Over-Contribution study.
Individuals continue to not
take required minimum distributions
In our prior review, we identified 471,383 individuals who were required to take minimum distributions in TY 2005 who did not report any distributions. We reviewed a judgmental sample of 30 individual accounts and determined that 5 individuals (17 percent) did not take any or all of their TY 2005 required minimum distributions. We determined that $188,852 (72 percent) of the $261,447 total estimated required minimum distributions for the 5 individuals was not taken and excise tax of $94,426 were not reported on this income. We did not project our results because our sample was judgmental.
For our analysis of TY 2006 and TY 2007, we identified 598,239 individuals who did not appear to have taken their required minimum distributions. We reviewed a statistically valid sample of 96 individuals and estimated that the population contained 255,498 noncompliant individuals who did not take required minimum distributions totaling more than $348 million.[33] We estimate the potential excess tax revenue loss of more than $174.2 million for TY 2006 and TY 2007.
The results of our statistically valid sample of 96 individuals are as follows:
Yearly minimum distributions from traditional IRA accounts are required
when an individual reaches age 70½.
These distributions are generally taxed as ordinary income on the individual’s
tax return. Roth IRA accounts are not
subject to the required minimum distribution rules. IRA custodians must identify on Form 5498 if
an individual is subject to a minimum distribution for the next year by
checking
IRS
Actions to Date Have Not Reduced Noncompliance With Required Minimum
Distribution Rules
In
our prior review, we recommended the IRS consider using the indicator shown on
Form 5498,
The
IRS agreed with both of these recommendations and requested that data from
When the IRS issued the regulations for required minimum distributions in 2002, it expressed concerns about the overall level of compliance in this area. The IRS indicated that it intended to monitor the effect of the reporting requirements for minimum distributions on compliance to determine whether it would be appropriate to modify the process in the future.[38]
Attorneys and accountants
commented that the IRS’ project to identify individuals noncompliant with required
minimum distributions has created an IRS presence in an area where one was
needed.
Apart from the four studies the IRS initiated, the IRS Employee Plans Compliance Unit[39] conducted a project to identify individuals with IRA account balances of $1 million or more who did not appear to have taken their required minimum distributions. The study identified 111 individuals. The Unit sent these 111 individuals a compliance letter requesting that they take their required minimum distributions. As of December 31, 2009, 88 (79 percent) of the individuals have taken their required minimum distributions totaling $6.1 million. The Unit is continuing to work with the remaining 23 (21 percent) individuals to ensure they take their required minimum distributions totaling $2.4 million during Fiscal Year 2010.
The 88 individuals’ reasons for failing to take their required minimum distribution appeared to meet the “reasonable error” standard (such as illness or a major life event) for a waiver of the excise tax. The only remaining standard for a waiver requires that the individual takes reasonable steps to remedy the shortfall. As of December 31, 2009, no excise tax has been assessed since 79 percent of the individuals appear to be eligible for a waiver and the Employee Plan Compliance Unit is still working with the remaining 21 percent of individuals to secure their required minimum distributions. Any individual who fails to take their required minimum distribution could be referred to the IRS Wage and Investment Division for appropriate future action, including assessment and collection of the excise tax. The IRS also informed us that a number of attorneys and certified public accountants have commented that this project has created an IRS presence in an area where one was needed.
A Service-wide strategy is the
key to reducing IRA noncompliance
The IRS should
develop a Service-wide strategy to address growing IRA noncompliance. Of particular concern is the lack of
functional ownership within the IRS for addressing IRA noncompliance. Our discussions with IRS management in the AUR
Program and the Examination function found that IRA noncompliance is largely
overlooked in these functions because workload is based on the tax effect of an
individual tax return rather than the total amount of revenue lost due to IRA
noncompliance.
Based on our analyses of IRA contributions
and required minimum distributions, noncompliance will likely continue to grow
and continue to result in significant revenue loss. By 2030, the number of people aged 65 and
over is expected to double to about 20 percent of the population, or more
than 71 million people. The number of
people aged 85 and older will be the fastest growing segment of the
The IRS has developed Service-wide strategies
to address other issues that significantly affect tax administration, such as
the Earned Income Tax Credit and identity theft. To better understand the issues, the IRS
formed Program Offices to develop policy and procedures in an attempt to
consistently manage the issues.
Recommendation
Recommendation 1:
The Deputy Commissioner
for Services and Enforcement should ensure a Service-wide strategy is developed
to address retirement provision noncompliance.
This strategy should include the development of processes to identify individuals who
do not comply with retirement provisions along with compliance efforts to
address the noncompliance.
Management’s Response: IRS management
agreed with this recommendation. Wage
and Investment and Tax Exempt and Government Entities Divisions agreed to work
together to develop a long-term strategy to reduce retirement provision
noncompliance. The Wage and Investment
Division Compliance Office will also reach out to other IRS stakeholders for
support as this strategy will contain compliance, education/guidance, and
outreach components.
Appendix I
Detailed Objective, Scope, and Methodology
The overall objective was to assess IRS actions to identify and correct individual excess contributions to IRAs and nondisbursements of required minimum distributions from IRAs. To accomplish our objective, we:
I. Evaluated actions the IRS has taken to address prior audit report[41] findings on excess IRA contributions and required minimum distributions.
A. Obtained and reviewed the Joint Audit Management Enterprise System Corrective Action Forms to determine the status of planned corrective actions associated with the TIGTA prior review of IRAs.
B. Obtained and reviewed audit findings pertaining to traditional and Roth IRAs reported by the Government Accountability Office.
C. Reviewed IRS publications and forms, Information Returns Master File[42] documentation, and other pertinent documents for information regarding excess IRA contributions and required minimum distributions.
D. Determined if IRS information being collected as part of the current IRS NRP study will address the findings in prior TIGTA and Government Accountability Office reports.
1. Contacted NRP officials to determine the status of the NRP study and identify what IRA information is being collected and how it will be used in the study.
2. Obtained IRA data from 5,452 closed NRP cases. We sorted the data and found incomplete or inconsistent information.
E. Obtained and reviewed the IRS AUR Program office’s study of excess traditional or Roth IRA contributions for TY 2006.
II. Performed computer analyses on IRA Contribution Information (Form 5498) data and Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. (Form 1099-R) data for TY 2006 and TY 2007 to identify individuals with traditional or Roth IRA contributions in excess of the maximum annual limit of $5,000.[43] See Appendix V for a detailed explanation of our audit methodology.
III. Identified individuals who did not take their required minimum distributions for TY 2006 and TY 2007. Specifically, we:
A.
Performed computer analysis to identify all TY 2005
Forms 5498 with a check in
B.
Performed computer analysis to identify all TY 2006
Forms 5498 with a check in
C. Reviewed a statistical sample of 96 individuals that were randomly selected from both tax years. We performed additional research of the individuals’ data stored on the IRS Integrated Data Retrieval System[44] to determine if a minimum distribution was required and taken. Our sampling criteria included:
Population = 598,2391
Confidence Level = 95 percent
Desired Precision = ± 7.5 percent2
Estimated Error Rate = 17 percent3
Sample Size = 962
1 = Sum of 284,723
for TY 2006 plus 313,516 for TY 2007.
2 = Various precisions and sample sizes were
considered, but our final selection was based on available audit resources.
3 = This was the
actual error rate observed in our prior review of IRAs.
D. Projected the results of the statistical sample to the population.
IV. Evaluated the reliability of IRS computer-processed data by performing run-to-run balancing and counts on the data to ensure all records were accounted for, verifying the Form 5498 and Form 1099-R data against the IRS Information Return Master File, and researching other individual data stored on the IRS Integrated Data Retrieval System. We concluded that the computer-processed data were sufficiently reliable to support the audit finding, conclusion, and recommendation.
Internal controls
methodology
Internal controls relate to management’s plans, methods, and procedures used to meet their mission, goals, and objectives. Internal controls include the processes and procedures for planning, organizing, directing, and controlling program operations. They include the systems for measuring, reporting, and monitoring program performance. We determined the following internal controls were relevant to our audit objective: the Wage and Investment Division’s policies, procedures, and practices for processing Forms 5498 and 1099-R and, more specifically, the traditional and Roth IRA reporting requirements. We evaluated these controls by interviewing management and analyzing traditional and Roth IRA data reported on the Forms 5498 and 1099-R.
Appendix II
Major Contributors to This Report
Michael
E. McKenney, Assistant Inspector General for Audit (Returns Processing and
Account Services)
Russell
P. Martin, Director
Tina
M. Parmer, Audit Manager
Sharon
A. Buford, Lead Auditor
Van
A. Warmke, Senior Auditor
Kim
I. McMenamin, Auditor
Richard Hilleson, Information Technology
Specialist
Appendix III
Commissioner C
Office of the Commissioner – Attn: Chief of Staff C
Commissioner, Tax Exempt and Government Entities Division SE:T
Commissioner, Wage and Investment Division SE:W
Director, Compliance, Wage and Investment Division SE:W:CP
Director, Customer Account Services, Wage and Investment Division SE:W:CAS
Director, Strategy and Finance, Wage and Investment Division SE:W:S
Director, Reporting Compliance, Wage and Investment Division SE:W:CP:RC
Director, Submission Processing, Wage and Investment Division SE:W:CAS:SP
Chief Counsel CC
Chief,
Program Evaluation and Improvement, Wage and Investment Division SE:W:S:PRA:
National Taxpayer Advocate TA
Director, Office of Legislative Affairs CL:LA
Director, Office of Program Evaluation and Risk Analysis RAS:O
Office of Internal Control OS:CFO:CPIC:IC
Audit
Liaison: Chief, Program Evaluation and
Improvement, Wage and Investment Division
SE:W:S:PRA:
Appendix IV
This appendix presents detailed information on the measurable impact that our recommended corrective actions will have on tax administration. These benefits will be incorporated into our Semiannual Report to Congress.
Type and Value of Outcome Measure:
· Increased Revenue – Potential; $202,333,250 in excise tax over 5 years due to 295,141 individuals not reporting more than $3.9 billion of excess contributions to IRAs (see page 5).
Methodology Used to Measure the Reported Benefit:
We performed an analysis of traditional and Roth IRA contributions for TY 2006 and TY 2007 and identified a total of 295,141 individuals who exceeded the annual maximum IRA contribution limit of $5,000[45] and did not report excise tax on these excess contributions.
These 295,141 individuals had excess contributions[46] totaling $1,569,131,766.[47] The unreported 6 percent excise tax on each individual’s excess contributions totaled $94,150,444.[48]
We believe these individuals
could continue to make the same excess contributions in subsequent years, and
that over 5 years, $202,333,250 in potential excise tax revenue would not be
collected. This amount was
calculated by computing the average excise tax amount for both years of $47,075,222,
multiplying the average by 5 years, then reducing the result by $33,042,860. Our prior report[49]
included the $33,042,860 as an outcome measure for potential unreported excise
tax for TY 2006 through TY 2010. In this
report, we computed the outcome measure for potential unreported excise tax for
TY 2008 through TY 2012. We reduced our
current outcome measure by the $33,042,860 to prevent overstating the amount.
Type and Value of Outcome Measure:
· Increased Revenue – Potential; $28,539,960 in income tax over 5 years on an estimated cumulative amount of $169,978,476 in unreported interest on excess contributions to IRAs (see page 5).
Methodology Used to Measure the Reported Benefit:
In addition to the $94,150,444 loss in excise tax for TY 2006 and TY 2007, there is a potential future compound interest effect as it relates to revenue loss from unreported interest on excess contributions over the next 5 years.
We calculated estimated unreported interest of $62,765,271 on the excess contributions of $1,569,131,766 identified for TY 2006 and TY 2007 using an interest rate of 4 percent. We divided the $62,765,271 by 2 to get an average of $31,382,635 for each tax year. We computed compound interest on the $31,382,635 over 5 years for a total of $169,978,476.
We calculated estimated unreported income tax of $47,593,973 on the estimated unreported interest of $169,978,476 using a 28 percent tax rate.[50] We reduced the $47,593,973 by $19,054,013. The difference was $28,539,960 in potential income tax that could be unreported over the next 5 years. Our prior report included the $19,054,013[51] of unreported income tax as an outcome measure for TY 2006 through TY 2010. In this report, we computed the outcome measure for TY 2008 through TY 2012. We reduced our current outcome measure by the $19,054,013 to prevent overstating the amount.
Type and Value of Outcome Measure:
· Increased Revenue – Potential; $174,249,074 in excise tax for required minimum distributions that were not taken by 255,498 individuals from their IRAs (see page 5).
Methodology Used to Measure the Reported Benefit:
We identified 598,239 individuals who did not appear to have taken their required minimum distributions for TYs 2006 and 2007 and reviewed a statistically valid sample of 96 individuals. Our preliminary results identified 41 individuals (43 percent) who appeared to be noncompliant. For each of the 41 individuals, we computed the amount of required minimum distribution not taken by dividing the sum of the IRA account balances by the individual’s applicable life expectancy rate and reducing the result by distributions, if any, that were taken from the IRA accounts. The estimated amount of required minimum distributions not taken by these 41 individuals totaled $55,921 and the 50 percent excise tax was $27,962.
Based on the statistical sample results, we estimate the population contains 255,498 noncompliant individuals who did not take required minimum distributions totaling $348,480,200. We are 95 percent confident that the number of noncompliant individuals in the population is between 195,996 and 315,000 (the margin of error is ± 59,502). In addition, we are 95 percent confident that the amount of required minimum distributions not taken is between $172,597,789 and $524,362,611 (the margin of error is ± $175,882,411), and the estimated amount of 50 percent excise tax is between $86,301,885 and $262,196,263 (the margin of error is ± $87,947,189).
Appendix V
Methodology to Compute Estimated Revenue Loss Associated
With Excess IRA Contributions
This appendix details TIGTA’s data analysis methodology used to identify individuals making excess IRA contributions for TY 2006 and TY 2007. This analysis was further refined from our prior review[52] to better identify the underreported excise tax. Our refined analysis is similar to the concept of the IRS AUR Program, which uses third-party reporting documents to identify potentially noncompliant individuals.
TIGTA Methodology for Tax Years 2006 and 2007
The
following information describes how we identified the 151,165 individuals with
$812.3 million in excess contributions above the maximum limit of $5,000 for
age 50 or older for TY 2006 and the 143,976 individuals with $756.8 million in
excess contributions above the $5,000 maximum limit for TY 2007. Combined, we identified 295,141 individuals with over $1.5 billion in excess
contributions above the $5,000 maximum limit.
The $1.5 billion equates to an IRS revenue loss of more than $202.3
million in additional unreported excise tax that we previously reported would
not be collected over 5 years.
Specifically, we:
· Identified 220,572,392 IRA Contribution Information (Form 5498) returns filed with the IRS for TY 2006 and TY 2007. We used IRS data files to identify these Forms 5498.
· Eliminated from the population of 220,572,392 the following Forms 5498:
· 190,866,746 Forms 5498 that did not report a traditional or Roth IRA contribution. Forms 5498 are used to report other IRA transactions, for example, roll over contributions, recharacterized contributions, etc.
· 89,696 Forms 5498 containing a case duplicate/amended indicator of ‘D’ (duplicate), ‘G’ (amended), or ‘R’ (original replaced by amended). These Forms 5498 were replaced by other Forms 5498 so they were eliminated to prevent double counting.
· Analyzed the remaining 29,603,922[53] Forms 5498 that reported a traditional or Roth IRA contribution. These Forms 5498 had a case duplicate/amended indicator of ‘F’ (original), ‘C’ (corrected), or ‘O’ (amended replacing original).
We analyzed the remaining 29,603,922 Forms
5498 as described below:
Identified 23,893,260 payee TINs (individuals) associated with the 29,603,922 Forms 5498. An individual can have several Forms 5498, for example, one for a traditional IRA account and another for a Roth IRA account. We counted each individual only once in our computer analysis.
Identified individuals having the following conditions:
o 1 or more Forms 5498 reporting a traditional IRA contribution greater than $5,000.
o 1 or more Forms 5498 reporting a Roth IRA contribution greater than $5,000.
o 1 or more Forms 5498 reporting traditional IRA contributions totaling $5,000 or less, and 1 or more Forms 5498 reporting Roth IRA contributions totaling $5,000 or less, but the combined IRA contributions totaled more than $5,000.
Eliminated individuals’ IRA contributions that appeared to be roll overs by matching the Form 5498 IRA contribution amount to a gross distribution amount reported on Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. (Form 1099-R) for the same tax year. For the amounts that matched, we assumed the custodian made an error by reporting an IRA roll over as an IRA contribution.
Reduced individuals’ IRA contributions that were withdrawn by matching the IRA account number on the Form 5498 to the same IRA account number on a Form 1099-R for the same year and subtracting the gross distribution amount from the IRA contribution amount.
Computed the amount of excess IRA contribution,[54] if any, for each individual by calculating the difference between the total IRA contributions reported on their Forms 5498 minus misreported roll overs, IRA contributions that were withdrawn, and the $5,000 maximum limit. We also computed the 6 percent excise tax on the excess contributions for each individual. The results for TY 2006 and TY 2007 are shown below.
Individuals With
Excess |
TY 2006 |
TY 2007 |
Combined |
|
Number of Individuals |
159,283 |
152,162 |
311,445 |
|
Total Excess Contributions |
$893,984,152 |
$873,750,890 |
$1,767,735,042 |
|
Total 6% Excise Tax[55] |
$53,640,493 |
$52,426,358 |
$106,066,851 |
Eliminated individuals that reported an amount on line 60 of U.S. Individual Income Tax Return (Form 1040) (used to report excise tax) for the same tax year they were identified as having excess IRA contributions. This elimination was very conservative since line 60 is used to report other excise tax.[56]
|
Elimination of Individuals Reporting an Amount on Form 1040, Line 60 |
TY 2006 |
TY 2007 |
Combined |
|
Number of Individuals |
8,114 |
8,180 |
16,294 |
|
Total Excess Contributions |
$40,489,862 |
$39,628,346 |
$80,118,208 |
|
Total 6% Excise Tax |
$2,429,496 |
$2,377,807 |
$4,807,303 |
We conducted further analysis of the TY 2006 Forms 5498 and determined that 46,455 (31 percent) of the 151,169 individuals (159,283 minus 8,114) had only 1 Form 5498 with excess IRA contributions totaling $511,551,922 and estimated 6 percent excise tax of $30,693,366. The remaining 104,714 (69 percent) individuals had 2 or more Forms 5498 with excess IRA contributions totaling $341,942,368 and estimated 6 percent excise tax of $20,517,631.
Further analysis of the TY 2007 Forms 5498 showed that 48,325 (34 percent) of the 143,982 individuals (152,162 minus 8,180) had only 1 Form 5498 with excess IRA contributions totaling $532,550,416 and estimated 6 percent excise tax of $31,953,185. The remaining 95,657 (66 percent) individuals had 2 or more Forms 5498 with excess IRA contributions totaling $301,572,128 and estimated 6 percent excise tax of $18,095,366.
· Sorted the list of individuals in descending order beginning with the largest amount of excess IRA contribution to the smallest amount. We selected the top 10 individuals for each tax year, researched the individuals’ IRA information on the Information Returns Master File,[57] and adjusted our data analysis results as needed.[58] An example of an adjustment is where the sum of several type ‘G’ (direct roll over to an IRA) distributions of differing amounts equals an amount reported as an IRA contribution. We could not perform this type of analysis of the Form 5498 IRA contributions and Form 1099-R distributions data using the computer. (Note: In its study of excess IRA contributions for TY 2006, the IRS excluded 1 case with an excess traditional IRA contribution of $247,316,000. The case was considered a data anomaly.)
|
Elimination of Individuals Based on Additional Research of Forms 5498
and Forms 1099-R |
TY 2006 |
TY 2007 |
Combined |
|
Number of Individuals |
4 |
6 |
10 |
|
Total Excess Contributions |
$41,154,568 |
$77,330,500 |
$118,485,068 |
|
Total 6% Excise Tax |
$2,469,274 |
$4,639,830 |
$7,109,104 |
· Summarized the results of the above analyses is shown on the following page:
|
|
Number of Individuals |
Total Excess Contributions |
Total 6% Excise Tax |
|
TY 2006 |
|
|
|
|
Computer Analysis of Forms 5498 |
159,283 |
$893,984,152 |
$53,640,493 |
|
Less: Results of Form 1040, Line 60, Match |
8,114 |
$40,489,862 |
$2,429,496 |
|
Less: Results From Additional Research of the Information Returns Master File |
4 |
$41,154,568 |
$2,469,274 |
|
Final Results for TY 2006 |
151,165 |
$812,339,722 |
$48,741,723 |
|
TY 2007 |
|
|
|
|
Computer Analysis of Forms 5498 |
152,162 |
$873,750,890 |
$52,426,358 |
|
Less: Results of Form 1040, Line 60, Match |
8,180 |
$39,628,346 |
$2,377,807 |
|
Less: Results From Additional Research of the Information Returns Master File |
6 |
$77,330,500 |
$4,639,830 |
|
Final Results for TY 2007 |
143,976 |
$756,792,044 |
$45,408,721 |
|
Combined |
|
|
|
|
Computer Analysis of Forms 5498 |
311,445 |
$1,767,735,042 |
$106,066,851 |
|
Less: Results of Form 1040, Line 60, Match |
16,294 |
$80,118,208 |
$4,807,303 |
|
Less: Results From Additional Research of the Information Returns Master File |
10 |
$118,485,068 |
$7,109,104 |
|
Final Results for Both Tax Years |
295,141 |
$1,569,131,766 |
$94,150,444 |
The final results showed that 295,141 individuals made excess contributions totaling more than $1.5 billion for TYs 2006 and 2007. The total estimated excise tax on the excess contributions was more than $94 million (average of $319 per individual).
Six Percent Excise Tax on Excess IRA Contributions
· Computed 6 percent excise tax of $94,150,444 on excess IRA contributions for TY 2006 and TY 2007. We calculated this amount by multiplying each of the 295,141 individuals’ excess IRA contributions by 6 percent, rounding each result to the nearest dollar, then totaling the amounts for all 295,141 individuals. Because we rounded for each individual, the $94,150,444 total excise tax for both years will not equal the total excess IRA contributions of $1,569,131,766 multiplied by 6 percent.
Income Tax Avoidance on Estimated Unreported Interest
Income on Excess IRA Contributions
· Calculated average excess IRA contributions of $784,565,883 for TY 2006 and TY 2007 by dividing $1,569,131,766 by 2.
· Calculated $169,978,476 of estimated unreported compound interest over 5 years using a 4 percent interest rate on the $784,565,883 average excess IRA contributions.
· Calculated $47,593,973 of potential income tax over 5 years by multiplying the $169,978,476 by a 28 percent income tax rate.
· From the $169,978,476, we subtracted $127,026,756, which we previously reported as unreported interest on excess contributions over 5 years using a 7 percent interest rate. The difference is $42,951,720, which is our revised estimate of potential unreported interest income over 5 years.
· From the $47,593,973, we subtracted $19,054,013, which we previously reported as potential tax on unreported interest over 5 years using a 15 percent tax rate. The difference is $28,539,960, which is our revised estimate of potential income tax on unreported interest income on excess IRA contributions over 5 years.
Appendix VI
IRA Contribution Information (Form 5498)
Figure 1 shows Copy A of a blank IRA Contribution Information (Form 5498) for TY 2007. Copy A is filed with the IRS. Not shown are Copy B, which is provided to the IRA owner, and Copy C, which is kept by the IRA custodian who prepared the Form 5498.
Figure 1: Form 5498
Figure
1 was removed due to its size. To see
Figure 1, please go to the Adobe PDF version of the report on the TIGTA Public
Web Page.
Traditional IRA –
Roth IRA –
Required Minimum Distribution – If
Appendix VII
Distributions From Pensions, Annuities, Retirement or
Profit-Sharing Plans, IRAs, Insurance Contracts, etc. (Form 1099-R)
Figure 1 shows Copy A of a blank Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. (Form 1099-R) for TY 2007. Copy A is filed with the IRS. Not shown are Copies 1 and 2, which are provided to be filed with a State, city, or local income tax return; Copies B and C, which are provided to the IRA owner; and Copy D, which is kept by the IRA custodian who prepared the Form 1099-R.
Figure 1: Form 1099-R
Figure 1 was removed
due to its size. To see Figure 1, please
go to the Adobe PDF version of the report on the TIGTA Public Web Page.
Required Minimum
Distributions from Traditional IRA – The IRA custodian must report a
traditional IRA distribution in
Appendix VIII
Management’s
Response to the Draft Report
DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
COMMISSIONER
WAGE AND
INVESTMENT DIVISION
MAR 16 2010
MEMORANDUM FOR MICHAEL R. PHILLIPS
DEPUTY INSPECTOR GENERAL FOR AUDIT
FROM: Richard Byrd. Jr. /s/Richard Byrd
Commissioner, Wage and Investment Division
SUBJECT: Draft Audit Report - A Service-wide Strategy Is Needed to Address Growing Noncompliance With Individual Retirement Account Contribution and Distribution Requirements (Audit #200940016)
I appreciate your continuing concern regarding noncompliance with Individual Retirement Account (IRA) contribution and minimum distribution requirements. Because of the potential significant overall revenue losses associated with IRA noncompliance, I agree that a Service-wide strategy is warranted. Executives from the Wage and Investment and Tax-Exempt and Government Entities Divisions recently met and agreed to share responsibility for development of this long-term strategy. This strategy will not only address compliance, but will also include plans for outreach and guidance for individual taxpayers and employee plan organizations. We will also consider amending regulations and pursuing math error solutions.
I agree with the outcome measures outlined in Appendix IV of your report. Full realization of the potential revenue you cite may not be realistic, however; our strategy should have a long-term and positive impact on improving compliance in this area. Attached are our specific comments to your recommendation. If you have any questions, please contact me, or a member of your staff may contact Don Mainwaring, Director, Reporting Compliance, Wage and Investment Division, at (404) 338-8983.
Attachment
Attachment
Recommendation 1
The Deputy Commissioner for Services and Enforcement should ensure a Service-wide strategy is developed to address retirement provision noncompliance. This strategy should include the development of processes to identify individuals who do not comply with retirement provisions along with compliance efforts to address the noncompliance.
Corrective Action
We agree with this recommendation. Wage and Investment and Tax Exempt and Government Entities Divisions agree to work together to develop a long-term strategy to reduce retirement provision noncompliance. The Wage and Investment, Compliance Office will also reach out to other IRS stakeholders for support as this strategy will contain compliance, education/guidance, and outreach components.
Implementation
Date
October 15, 2012
Responsible
Official
Director, Compliance, Wage and Investment Division
Corrective Action
Monitoring Plan
We will monitor this corrective action as part of our internal management control process.
[1] The
Investment Company Institute is the national association of
[2] Retirement asset growth has normally correlated with stock and bond market returns and in 2008 nearly all assets experienced negative returns.
[3] These were the contribution limits in effect for Tax Years 2006 and 2007, which are the periods we evaluated. The maximum contribution limit increased $1,000 for Tax Year 2008 to $5,000, ($6,000 if age 50 or older).
[4] Individual Retirement Account Contributions and Distributions Are Not Adequately Monitored to Ensure Tax Compliance (Reference Number 2008-40-087, dated March 28, 2008).
[5] The IRS completed and provided results for the study of excess IRA contributions for TY 2006. We have not received results for the two studies on excess IRA contributions for TY 2007 and required minimum distributions for TY 2007. Data from the IRS National Research Program study of TY 2007 individual returns will not be available until late 2010. This study will include data on noncompliance with traditional and Roth IRA contribution rules.
[6]
[7] The
Investment Company Institute is the national association of
[8] Retirement asset growth has normally correlated with stock and bond market returns, and in 2008 nearly all assets experienced negative returns.
[9] Adding the number of households owning each type of IRA will not equal the total number of households owning IRAs since households may own more than one type of IRA.
[10] These were the contribution limits in effect for Tax Years 2006 and 2007, which are the periods we evaluated. The maximum contribution limit increased $1,000 for Tax Year 2008 to $5,000, ($6,000 if age 50 or older).
[11] Eligibility takes into account whether the individual has taxable compensation, age at the end of the year, and the income limits and filing status if the individual or spouse had an employer-sponsored retirement account.
[12] Congress passed the Worker, Retiree, and Employer Recovery Act of 2008 (Pub. L. No. 110-458), which provides for a 1-year waiver of the required minimum distribution rules for certain retirement plans and accounts. Under Section 201, no minimum distribution is required for Calendar Year 2009 from individual retirement plans and certain employer-provided qualified retirement plans. The next required minimum distribution would be for Calendar Year 2010.
[13] Individuals may request the IRS excuse the penalty if failure to take the required minimum distribution was due to reasonable error.
[14] Eligibility for making a Roth IRA contribution depends on the individual’s taxable compensation, modified Adjusted Gross Income, filing status, and whether the individual made traditional IRA contributions. Age and coverage by an employer retirement plan does not affect eligibility for making Roth IRA contributions.
[15] An example of a qualified distribution is a payment from a Roth IRA made at least 5 years after the contribution was placed in the IRA account and the individual is at least 59½ years old.
[16] The $1,000 is computed by dividing the IRA balance (i.e., fair market value) of $26,500 by 26.5, which is the uniform lifetime distribution period for an unmarried individual age 71.
[17] An agent, bank, trust company, or other organization which holds and safeguards assets belonging to individuals or companies.
[18] We assumed the $5,000 maximum annual IRA contribution limit remains the same over the contribution periods.
[19] Appendix VI provides an example of a Form 5498.
[20] Appendix VII provides an example of a Form 1099-R.
[21] A branch in the IRS Wage and Investment Division, Customer Account Services function.
[22] The Information Returns Master File contains tax information reported from third parties for the current and prior 5 tax years.
[23] Individual Retirement Account Contributions and Distributions Are Not Adequately Monitored to Ensure Tax Compliance (Reference Number 2008-40-087, dated March 28, 2008).
[24] The IRS completed and provided results for the study of excess IRA contributions for TY 2006. We have not received results for the two studies on excess IRA contributions for TY 2007 and required minimum distributions for TY 2007. Data from the IRS National Research Program study of TY 2007 individual returns will not be available until late 2010. This study will include data on noncompliance with traditional and Roth IRA contribution rules.
[25] To avoid erroneously identifying individuals age 50 and older as having exceeded their IRA contribution limit, the maximum allowable amount of $4,500 for TY 2005 was used.
[26] To avoid erroneously identifying individuals age 50 and older as having exceeded their IRA contribution limit, the maximum allowable amount of $5,000 for TYs 2006 and 2007 was used.
[27] For TY 2006 and TY 2007, the 6 percent excise tax was calculated for each individual, rounded, and totaled. Because of rounding for each individual, the results will not match the total excess IRA contributions multiplied by 6 percent.
[28] Our
estimates use the average of the tax rates that the IRS used in its study of
excess IRA contributions for
TY 2006. However, our estimate included
both traditional IRA and Roth IRA excess contributions; whereas, the IRS study
included only Roth IRA excess contributions.
Our results were based on analyses of IRA contributions reported on all
Forms 5498 submitted to the IRS; whereas, the IRS study only considered IRA
contribution data for taxpayers that were included in the AUR Program.
[29]
Unreported interest if compounded annually over
5 years only on the average excess contributions of $784.5 million for TYs 2006
and 2007.
[30] This is the revenue loss calculated at a 28 percent effective tax rate. Appendix V provides more information on how TYs 2008 to 2012 amounts were computed.
[31] The study did not provide the number of cases that was used to compute this average.
[32] The minimum estimate is based on a 2 percent gain on investment and the maximum estimate is based on a 6 percent gain on investment. Both estimates used a 28 percent income tax rate.
[33] See Appendix I for the sampling methodology.
[34] For example, we could not determine if one individual took a required minimum distribution for TY 2007 because the fair market value of the IRA was not reported. The fair market value is needed to compute the required minimum distribution.
[35] The Information Reporting Program Advisory Committee, which was established in 1991, serves as an advisory body to the IRS Commissioner. The Committee provides a public forum for discussion of information reporting issues of mutual concern between IRS officials and representatives of the public. Committee members research; analyze; provide recommendations regarding specific information reporting issues, current or proposed IRS information reporting policies, programs, and procedures; and suggest improvement to information reporting operations and/or administration of the Information Reporting Program through a final report.
[36] In some instances, taxpayers may be able to waive the penalty due to reasonable cause.
[37] The period from January through mid-April when most individual income tax returns are filed.
[38] Notice 2002-27, Reporting Required Minimum Distributions From IRAs, 2002-18 I.R.B. (May 6, 2002) and T.D. 8987, Required Distributions from Retirement Plans, 2002-19 I.R.B. (May 13, 2002).
[39] The Employee Plans function is organized under the IRS Tax Exempt and Government Entities Division. The Employee Plans function helps retirement plan sponsors, plan participants, and practitioners working in the retirement benefits arena understand and comply with the pension law. The Employee Plans Compliance Unit focuses on compliance projects, performs data analysis, and increases its presence through “soft contacts” and compliance checks. The IRS mails soft contacts (i.e., notices) to potentially noncompliant taxpayers to inform them of what information the IRS has and to request they review their records and take appropriate action to remedy the condition.
[40]
[41] Individual Retirement Account Contributions and Distributions Are Not Adequately Monitored to Ensure Tax Compliance (Reference Number 2008-40-087, dated March 28, 2008); INDIVIDUAL RETIREMENT ACCOUNTS, IRS Enforces Some but Not All Key Rules, and Opportunities Exist to Strengthen Taxpayer Compliance (GAO-07-1059SU, dated September 2007); and INDIVIDUAL RETIREMENT ACCOUNTS, Additional IRS Actions Could Help Taxpayers Facing Challenges in Complying with Key Tax Rules (GAO-08-654, dated August 2008).
[42] The Information Returns Master File contains tax information reported from third parties for the current and prior 5 tax years.
[43] IRA contributions are limited to $4,000 per year ($5,000 if age 50 or older) for TY 2006 and TY 2007. To avoid erroneously identifying individuals age 50 or older as having exceeded their IRA contribution limit, we used the maximum limit of $5,000 in our analysis.
[44] IRS computer system capable of retrieving or updating stored information; it works in conjunction with a taxpayer’s account records.
[45] IRA contributions are limited to $4,000 per year ($5,000 if age 50 or older) for TY 2006 and TY 2007. To avoid erroneously identifying individuals age 50 or older as having exceeded their IRA contribution limit, we used the maximum limit of $5,000 in our analysis.
[46] Contributions greater than the $5,000 maximum contribution limit for TY 2006 and TY 2007 are defined as “excess” IRA contributions.
[47] This amount was averaged for both TY 2006 and TY 2007 totaling $784,565,883. This amount over 5 years equals $3,922,829,415.
[48] For TY 2006 and TY 2007, the 6 percent excise tax was calculated for each individual, rounded, and totaled. Because of rounding for each individual, the results will not match the total excess IRA contributions multiplied by 6 percent.
[49] Individual Retirement Account Contributions and Distributions Are Not Adequately Monitored to Ensure Tax Compliance (Reference Number 2008-40-087, dated March 28, 2008).
[50] We used the same tax rate of 28 percent that the IRS used in its study of TY 2006 IRA contributions.
[51] In our prior report, we used a 15 percent tax rate to compute the $19,054,013 of unreported income tax.
[52] Individual Retirement Account Contributions and Distributions Are Not Adequately Monitored to Ensure Tax Compliance (Reference Number 2008-40-087, dated March 28, 2008).
[53] We computed this number as 220,572,392 - 12,028 - 190,866,746 - 89,696 = 29,603,922.
[54] IRA contributions greater than the maximum limit of $5,000 for TY 2006 and TY 2007 are defined as “excess” IRA contributions. To avoid erroneously identifying individuals age 50 or older as having exceeded their IRA contribution limit, we used the maximum limit of $5,000 in our analysis.
[55] The excise tax amounts in the table will not equal the excess contributions multiplied by 6 percent because we multiplied each individual’s excess IRA contributions by 6 percent, rounded the result to the nearest dollar, and totaled the amounts. This explanation applies to all 6 percent excise tax amounts included in Appendix V.
[56] An amount reported on Form 1040, line 60, is supported by attaching Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts (Form 5329). Form 5329 includes additional taxes on early distributions; certain distributions from education accounts, excess accumulation in qualified retirement plans, including IRAs; and excess contributions to traditional IRAs, Roth IRAs, Coverdell education savings accounts, Archer medical savings account, or health savings accounts. Data were only available for the amount reported on Form 1040, line 60. Data were not available for amounts reported on Form 5329.
[57] The Information Returns Master File contains tax information reported from third parties for the current and prior 5 tax years.
[58] We limited our review to the top 10 individuals with the greatest amount of excess contributions for each tax year. There may be other individuals with excess IRA contributions that could be adjusted. However, we did not have the resources to research Information Returns Master File data for each individual with excess IRA contributions.