Treasury Inspector General for Tax Administration
April 27, 2010
TIGTA - 2010-15
Contact: Karen Kraushaar
WASHINGTON -- The Federal Government is losing millions of dollars each year due to increasing taxpayer noncompliance with Individual Retirement Account (IRA) requirements, according to a new report publicly released today by the Treasury Inspector General for Tax Administration (TIGTA).
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. In 2006 and 2007, individuals were allowed to contribute up to $4,000 per year to IRAs and $5,000 if they were age 50 or older. Excess contributions were subject to a 6 percent excise tax.
TIGTA reviewed the actions taken by the IRS to identify and correct individual excess contributions to IRAs and nondisbursements of required minimum distributions from IRAs since a March 2008 TIGTA report analyzing 2005 data. That report found that Internal Revenue Service (IRS) processing procedures for IRAs do not ensure that individuals are complying with IRA rules.
In the report released today, TIGTA found that 295,141 individuals made more than $1.5 billion in excess contributions to their IRAs in 2006 and 2007, resulting in an estimated loss of $94 million in excise tax and $17 million in income tax. In addition, TIGTA found that 255,498 individuals did not take the required minimum distributions totaling $348 million during that time, resulting in an estimated tax revenue loss of $174 million.
In response to TIGTA's 2008 report, the IRS initiated four studies to analyze IRA compliance. The only completed study confirmed TIGTA's 2008 findings and TIGTA believes the remaining three studies will also validate their findings on noncompliance.
"The IRS has yet to address the significant revenue losses associated with IRA noncompliance," said J. Russell George, the Treasury Inspector General for Tax Administration. "Based on our analysis, noncompliance will likely grow and result in significant revenue loss."
TIGTA recommended that the IRS develop a Service-wide strategy to address the growing noncompliance with limits on IRA contributions. The IRS agreed that a Service-wide strategy is necessary and plans to incorporate compliance, education and outreach components.
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