TIGTA recommends additional improvements to IRS strategy for addressing excess contributions to IRAs

Although the IRS has taken action to address prior recommendations, the Treasury Inspector General for Tax Administration (TIGTA) recommends enhancements for the IRS strategy to address excess contributions to individual retirement arrangements (IRAs).

Background

According to the Government Accountability Office, an estimated 43 million individuals had IRAs in Tax Year 2011 with a fair market value of $5.2 trillion. There are rules that limit the amount IRA owners may contribute to their IRAs each year. TIGTA notes that individual noncompliance with IRA contribution rules (i.e, excessive contributions) results in revenue loss to the Federal Government.
In prior years, TIGTA performed audits concerning compliance with IRA contribution rules and recommended that the IRS develop a strategy to address noncompliance with the rules. In response to TIGTA recommendations, the IRS developed and implemented a broad-based strategy that focuses on educating tax preparers and individuals about IRA rules and notifying individuals when they have potentially exceeded contribution limits. TIGTA notes that the IRS has taken positive steps toward testing its strategy by adding controls to identify and address excess IRA contributions.

Recommendations

While the IRS took action to address prior recommendations, TIGTA has determined that additional improvements can be made. For example, the IRS developed education materials for individuals and tax preparers but did not consider education materials for IRA custodians. TIGTA identified a significant number of inaccurate IRA information documents submitted by IRA custodians. Including outreach to IRA custodians should improve the accuracy of information documents sent to the IRS.
As part of its action to address prior recommendations, the IRS tested a methodology to identify and notify individuals with potentially excessive IRA contributions. While the IRS states it only intended to identify a suitable sample population for its test, TIGTA identified a significant number of potentially noncompliant individuals who were not included in the universe from which the IRS selected its sample. If the IRS decides to continue compliance efforts based on its test, having a more complete and accurate population of potentially noncompliant taxpayers would help IRS management select the most productive cases to pursue with limited compliance resources, according
to TIGTA.

Therefore, TIGTA has recommended that when evaluating future efforts related to the IRS strategy, the Commissioner, Wage and Investment Division, should consider: (1) developing education materials for IRA custodians informing them of common mistakes made on information documents and the importance of submitting accurate information documents, and (2) identifying a more complete and accurate universe of individuals who potentially made excess contributions from which to select potentially productive cases.

IRS officials have replied that they plan to continue to inform IRA custodians of issues and errors affecting the administration of IRAs from a taxation perspective. Additionally, the IRS has agreed to identify a more complete and accurate universe of individuals who potentially made excess contributions as it is a logical next step in expanding the IRA soft notice program from its current pilot state.

Source: TIGTA, “Actions Can Be Taken to Further Improve the Strategy for Addressing Excess Contributions to Individual Retirement Arrangements,” March 17, 2015, Reference Number: 2015-10-020.

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