Smart TaxesSmart Taxes

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.

By MSN Money Partner Feb 13, 2012 12:56PM

The post is by Ashlea Ebeling of 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:


Feb 13, 2012 3:11PM
Why don't the IRS target the politicians and Govt. workers that owe the back taxes of over 2 billion dollars? Some of the this group are probably retired.  Could it be that they are the friends of the IRS? Why don't we hear something about that group from the IRS? I guess the IRS is silent on that like obama is silent on Fast and Furious, Solyndra and debt reduction. I know someone that is very low income and they are wide open pushing him but I guess he don't have political pull.
Feb 13, 2012 4:59PM
So when is the IRS going to aggressively go after the politicians that don't pay their taxes and/or just don't file at all? Seems to me that they could get a great deal of money out of the back taxes that politicans owe.
Feb 13, 2012 3:40PM
Go after the millions that work for cash or off the books. 
Feb 13, 2012 5:40PM
If you have survived out idiotic government for 65 years and have retired and drawing social should not have to pay income tax, period.   Is there not a point when the crooks in washington and the IRS can leave you alone to finish out the last few years of your life without their threats and thievery????? 
Feb 13, 2012 5:01PM
Figures go after the people who have worked their whole life,why is it we never hear about the irs investigating the people who abuse the welfare system i.e. having multiple children the father using different address so that he can use the childrens deduction on his taxes while the mother gets free rent,utilities,food stamps,school lunches,college tuition etc!
Feb 13, 2012 4:42PM
Its not the retirees that are cheats.  Its the stupid and confusing tax code that cheats. Cheats in favor of corporations, political connected, etc..   The author should read his article.  Frankly,  I don't like being called a tax  cheat.  So get your act together.
Feb 13, 2012 8:19PM
Oh yeah.  Blame the old people again.  It is like the government wants people to work until they are in their 70s but the corporations at the job interview ask :  When did you graduate from high school?  You are not too old.  You are too experienced and too educated.  Too bad. So sad.  Better luck next time.  That is the way it is.  If the government needs someone to blame, it should look at the people in charge. Smile
Feb 13, 2012 4:51PM
brilliant, if only the federal gubment was that passionate about recovering the 10s of billions per year in medicare fraud and incompetence alone.
Feb 13, 2012 7:00PM

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

Feb 13, 2012 7:27PM
ok which one of two hundred thousand rules should I use to determine my tax situation this year, of course that will change next year as their will be a additional two hundred thousand new rules to follow, why can't those idiots in washington just do a flat rate tax on consumption, we have the stupidest people writing the laws of this country, its disgusting
Feb 13, 2012 4:45PM
What about the 49% that don't pay any tax? 
Feb 13, 2012 4:31PM
Go after the old folks their easy pickens. Might make a whole lot more tax money with these out of country accounts or off shore accounts where money is hidden. We seniors have paid our way and our taxes. Welfare money going up in smoke & alcohol might be better place to save some bucks. How about working for a living instead of mooching off the neighbors? Less tax bill for government and more tax money to spend on something constructive. As far as casinos go it is a lot cheaper than American Hospitals & Doctors who want every last cent you own.
Feb 13, 2012 4:54PM
you will NEVER see a flat tax in this country unless its a national sales tax. (which is coming if nobama gets re-elected) flat tax is too efficient. first, it would eliminate an untold number of bureaucrats AND private sector accountants, consultants, and lawyers. it's a win win for the us taxPAYER, but a lose lose for the ones responsible for making it broken/complicated.
Feb 13, 2012 5:23PM
Why dont they start with members of their own administration,, and then go on to all the people who work for the government that havent paid taxes for years ,,, Hipocrits
Feb 13, 2012 4:38PM

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.


Feb 13, 2012 6:47PM

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!!

Feb 13, 2012 8:07PM

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.

Feb 13, 2012 5:50PM

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.

Feb 13, 2012 6:36PM
Unfortunately this brings to mind a period in IRS history when the people most unable to afford a professional tax attorney were the ones targeted by the IRS. It would be nice if they started paying a bit more attention to the companies and individuals deliberately cheating on their taxes rather than those on fixed incomes. Getting a bit tired of bailing out big business while our government continues to attack and ignore the individual.
Feb 13, 2012 6:39PM

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?


Please help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease use this form to notify the moderators. They will investigate your report and take appropriate action. If necessary, they report all illegal activity to the proper authorities.
100 character limit
Are you sure you want to delete this comment?


Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.