Monday, November 29, 2010

IRA Non-Compliance

A recent report from the Treasury Inspector General for Tax Administration (TIGTA) revealed high levels of taxpayer noncompliance with respect to IRA excess contributions and required minimum distributions (RMDs). The report, which followed an earlier, similar report, showed that not only has the IRS not reduced the level of noncompliance, but to the contrary, it has actually been increasing.

The TIGTA report disclosed that during the 2006 and 2007 tax years, some 295,141 individuals made excess contributions to IRAs. These excess contributions totaled $812.3 million during the 2006 tax year and $756.8 million during the 2007 tax year. Together, the report estimates that $94.2 million of excise tax revenue and $17.6 million income tax revenue related to IRA excess contributions were lost during these years. Excess Roth IRA contributions pose a significantly greater risk to lost tax revenue because future distributions from such accounts will be tax-free.

The TIGTA report also revealed high levels of noncompliance with respect to required minimum distributions. During the 2006 and 2007 tax years, almost 256,000 taxpayers did not take RMDs totaling $348.5 million, resulting in an estimated loss of $174.2 million in tax revenue.

The TIGTA report makes a number of specific recommendations in order to improve IRA compliance. One suggestion is to require IRA custodians to estimate the RMDs for taxpayers each year. It further recommends that such information be used in the IRS’ AUR (automated underreported) Program.

It is always a good idea to check with your IRA custodian to insure you took the proper RMD each year from all of your accounts, whether you are the original owner or have inherited an IRA from another person. If you are contributing to an IRA, consult with your tax advisor to make sure you are still eligible to contribute, are contributing to the appropriate type of IRA, and are not exceeding the maximum amount that can be contributed.

By IRA Technical Consultant Marvin Rotenberg and Jared Trexler
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