TREASURY INSPECTOR GENERAL FOR TAX ADMINISTRATION

Office of Audit

Highlights

ADDITIONAL ACTIONS COULD IMPROVE COMPLIANCE WITH
EARLY RETIREMENT DISTRIBUTION TAX REQUIREMENTS

Final Report issued on May 22, 2020

Highlights of Reference Number:  2020-10-018 to the Commissioner of Internal Revenue.

IMPACT ON TAXPAYERS

Taxpayers who take an early distribution from their retirement accounts must pay a 10 percent additional tax unless they qualify for certain exceptions.  The IRS’s Automated Underreporter (AUR) Program systemically identifies taxpayers who took an early distribution but did not pay the tax.  Failure to enforce taxpayer compliance with this tax creates an unfair burden on the majority of taxpayers who pay all of their taxes on time.

WHY TIGTA DID THE AUDIT

This audit was initiated to determine whether the AUR Program is identifying and working the most productive cases for which taxpayers potentially owe a 10 percent additional tax on early distributions from retirement plans.

WHAT TIGTA FOUND

Due to resource constraints, it is important the AUR Program work the highest priority cases with the most significant impact on tax administration.  The AUR Program worked only 8 percent of Tax Year 2016 cases for which taxpayers reported an early distribution but did not pay the additional tax.  Most cases selected for work were either later screened from further review or resulted in no assessment.

TIGTA compared the exceptions taxpayers claimed on Forms 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, with internally available information and identified 6,899 cases with potentially invalid exception claims.  The IRS could have potentially assessed approximately $7.5 million for these returns. TIGTA identified: 1) 5,450 cases for which the retirement distribution was made from a type of retirement account that **************************2********************* 2) 657 cases for which taxpayers did not ****************2******************** 3) 638 cases for which taxpayers did not have evidence of ****************2************** and 4) 154 cases for which taxpayers received *******************************************2*********************************************  Periodic analysis of Form 5329 filings would allow the IRS to identify and notify taxpayers about potential noncompliance issues.

The AUR Program selected to work 368 of the 6,899 cases with potentially invalid Form 5329 exception claims.  However, the AUR Program generally did not ******************************2******************************************* In these situations, AUR tax examiners closed the cases during screening without making changes to the taxpayers’ accounts.  AUR tax examiners did not make a determination about the ***************************************2********************************************************************

In addition, AUR tax examiners ******************************************2****************************************************** as part of the AUR Program.  TIGTA estimates the IRS could have potentially assessed approximately $2.8 million in taxes for potentially invalid responses.

WHAT TIGTA RECOMMENDED

TIGTA made four recommendations including that the IRS ensure AUR examiners ********************************2**************************************************** periodically analyze non-selected cases ******************************2************************* consider the feasibility of revising instructions for Form 5329; and ensure AUR examiners make *****************************************************2***********************************************

In their response, IRS management agreed or partially agreed with three recommendations and plans to take corrective actions.  However, the IRS ****************2******************** *****************************************************2******************************* TIGTA believes these actions would improve tax compliance.

 

READ THE FULL REPORT

To view the report, including the scope, methodology, and full IRS response, go to:

https://www.treasury.gov/tigta/auditreports/2020reports/202010018fr.pdf.

Redaction Legend:

2 = Law Enforcement Techniques/ Procedures and Guidelines for Law Enforcement Investigations or Prosecutions.

 

Phone Number   /  202-622-6500

E-mail Address  /  TIGTACommunications@tigta.treas.gov

Website             /  https://www.treasury.gov/tigta