IRS targets retiree tax cheats
A new report says more than $4 billion in retirement income is not reported. But a confusing system may be more to blame than tax evasion.
The post is by Ashlea Ebeling of Forbes.com.
The downside of all the saving for retirement we do is that when it comes to taking the money out, there’s usually a tax bill to face. The taxpayer must determine if this income is totally taxable, partially taxable or not taxable at all.
Lots of folks are getting it wrong. The Internal Revenue Service is ferreting them out, and more could be done to make sure everyone is paying up, according to a new report, "Opportunities Exist to Identify More Taxpayers Who Underreport Retirement Income," by the treasury inspector general for tax administration.
"Given the magnitude of underreporting, even small improvements in the IRS's examination of tax returns with retirement income could increase taxpayer compliance and generate substantial revenue to the federal government to reduce the tax gap," the report says.
How much is at stake? In a tax gap study for 2001, the IRS estimated that as much as $4.2 billion could be attributed to underreported retirement income. For tax years 2008 and 2009, the IRS reported that taxpayers filed 21 million returns with IRA income totaling $293 billion and 52.2 million returns with pension income totaling $1 trillion. (Post continues below video.)
The way the IRS determines if you’re correctly reporting taxable retirement income is by matching what you put on your 1040 with forms that your employer or financial institution send to you and the IRS (Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans). The IRS’s "automated underreporter program" made tax assessments of $607.5 million on 217,811 tax returns in tax year 2007, based on reviewing 1099-Rs.
But the IRS could have picked up more taxable retirement income if the 1099-Rs were made clearer, the report says. The inspector general found that taxpayers receive Form 1099-Rs with "contradictory or confusing information regarding the amount of taxable retirement income to put on their tax returns."
The inspector general found forms listing $107.5 billion in taxable amounts in total that all had a box checked that said taxable amount not determined." It also found forms with distributions totaling $67 billion where the taxable amount was left blank. "This contradictory or absent information can confuse taxpayers, resulting in them reporting the incorrect amounts of retirement income on their tax returns," the report says.
The report's top recommendation is to revise the Form 1099-R to clarify the meaning of "taxable amount not determined": The box should clearly communicate that the taxpayer is responsible for determining the taxable amount.
The IRS conceded in its response to the report that the rules around reporting taxable retirement income represent one of the more complex areas of the tax law, and agreed that it would revise the instructions for Form 1099-R to make it clear that taxpayers are responsible for determining the taxable amount of their retirement income. And the IRS plans to study the feasibility of capturing additional information on a form to be filed with the tax return.
The IRS dismissed a recommendation to include dates of retirement income distributions on the 1099-R as largely unworkable. (This would catch folks who, instead of doing direct institution-to-institution transfers, cash out their retirement money and miss the 60-day rollover period for moving it back into a qualified plan.)
The national taxpayer advocate has written about the complexity of the retirement savings provisions in the tax code, noting that there are more than 12 alternative vehicles with different and sometimes seemingly conflicting rules.
It behooves you to study the rules and keep track of your contributions to retirement accounts -- whether they are made on a pretax or after-tax basis -- to make sure that you don’t run into the opposite problem of overpaying tax on retirement income. And you’ll have your records at the ready if you hear from the IRS.
More from Forbes and MSN Money:
VIDEO ON MSN MONEY
IRS what are you doing to Collect all the back taxes that the Federal Employees owe? Big cheaters in Congress too. Some on President Obama's staff owe also.
This figure runs into the millions.
Leave the retirees alone
Yea, let the big fish that can hire tax lawyers go, they present the risk of making you IRS folks look foolish.
So guys that can afford to pay, pay some creep to beat the government, and the little hard working honest guy gets his azz in a jam.
Why doesn't the government calculate how much that retirement money was worth -- in buying power -- when it went INTO the retirement accounts as compared to how LITTLE it is worth today?
The IRS -- or somebody -- should be issuing a REFUND to the retirees, and not persecuting them!!
Looks like the middle class is being bombed from different angles, the biggest cheats are the financial institutions, they take your money and it's okay. By the time a retiree is ready to rest, they can't, now they have to go back to work because we have billions of lazy no good for nothing individuals whom we have to support and those who are being paid to run the country are sending us to a third world country. Other countries are becoming stronger and stronger while ours is going under.
So interesting. I keep hearing from the left that our economic problems and debt are all due to 'the rich' not paying their fair share or that 'the rich' don't pay their taxes. If we could only make 'the rich' stop cheating on their taxes then all our poroblems would be solved. So who then does our IRS go after??? Retirees.
Yeah, that argument doesn't make any sense to me either.
OK the IRS can go after retired tax cheaters who are trying to keep their retirement funds, but they can't collect taxes from the rich who hide it? Let's see what is wrong with that picture? I do believe the president is trying to get the rich to pay up - either by higher taxes or closing IRS loopholes - but if you have most of congress who are millionaires - wonder why you can get that done congress?
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