Tax Help for IRS Scrutiny-Retirement Income

An MSN article titled IRS Targets Retiree Tax Cheats points to a report from The Treasury Inspector General for Tax Inspection that is critical of how the IRS processes reported retirement income. The report mentions the inspector general’s recommendations for improvements to the process that would provide tax help to the growing number of taxpayers who inadvertently under-report retirement income and end up with hefty IRS penalties and fines.

The Treasury Inspector General’s report states that the IRS examination of retirement income is a big part of the problem. Currently, The way the IRS determines a taxpayer retirement income is by matching what was stated on their 1040 against what the employer has reported to the IRS on Form 1099-R, (Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans). Discrepancies are found using the automated under-reporter program which for the 2007 tax year, found under-reported taxes for 1099-R’s to be $607.5 million on 217,811 tax returns.

However, the inspector general reported that the IRS could have picked up even more taxable retirement income if the 1099-Rs were made clearer.

After careful study, it was determined that taxpayers often received Form 1099-Rs with contradictory or confusing information regarding the amount of taxable retirement income. As a result, confused taxpayers often omitted or overlooked information and incorrectly reported retirement income on their tax returns.

The Inspector General’s recommendation was for the IRS to revise the 1099-R form to clarify the meaning of “taxable amount not determined” so that all information clearly communicates taxpayer responsibility for determining their taxable amount of their retirement income. Changes in this process alone could bring taxpayers back into compliance, collect more revenue and shrink the $385 billion tax gap (the difference between what taxpayers owe and what was received by the IRS).

The IRS admitted that the area of 1099-R and retirement savings is one of their most complex areas of the law and agreed to revise the instructions to make taxpayer responsibility clear. The IRS will still recommend taxpayers include dates on the 1099-R Form of their retirement income distributions – thus making sure people who decide to cash out of a retirement account and not just transfer funds – stay compliant by paying taxes on it if they miss their 60-day rollover period.

It is very important taxpayers understand the rules that govern their retirement accounts. When in doubt, hire a CPA for expert advice so you don’t end up with tax troubles.  Saving for retirement means you are saving to enjoy the prime of your life, not seeking IRS tax relief because you did it wrong.

More Tax Help, IRS News and Tax Relief Tips:

  1. Treasury Proposes Multilateral Agreement for Offshore Compliance
  2. Offshore Tax Evaders Get Preferred IRS Help
  3. Doctor Sentenced for Failing to File FBAR Reports
  4. Swiss Pressured to Reveal All Offshore Accounts
  5. Swiss Bank Wegelin Avoids Court Appearance

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