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Retirement Planning > Saving for Retirement > IRAs

IRS Faces 2023 Audit of Its Own IRA Enforcement Efforts

By Allison Bell

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What You Need to Know

  • The Treasury Inspector General for Tax Administration works to make the IRS more efficient.
  • Clients who make excess IRA contributions or take early withdrawals are supposed to file Form 5329.
  • TIGTA wants to see what the IRS is doing to enforce the Form 5329 filing requirements.

The Internal Revenue Service now faces extra pressure to enforce tax reporting rules related to individual retirement arrangements and other types of retirement accounts.

The Treasury Inspector General for Tax Administration has listed IRS retirement account police work second on its list of IRS audit priorities for fiscal year 2023 — the 12-month period that started Oct. 1.

TIGTA officials say they will “determine whether the IRS is effectively ensuring that taxpayers comply with filing requirements for [IRS] Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, when they receive an early distribution from a retirement account or had excess contributions to individual retirement arrangements.”

What It Means

Some clients who have taken early IRA withdrawals or who have added too much to their IRAs may have simply skipped filing their Form 5329 forms.

The IRS may now work harder to identify and punish the clients with Form 5329 problems.

TIGTA

The Treasury Inspector General for Tax Administration is one of four inspectors general offices at the U.S. Treasury Department.

TIGTA is responsible for promoting efficiency and effectiveness in the administration of federal internal revenue laws.

It also fights fraud and abuse at the IRS and related entities.

Form 5329

Form 5329 is a tax form that individuals are supposed to use to report taxable early withdrawals from IRAs, other retirement plans that qualify for special tax treatment and modified endowment contracts.

The IRS uses that information to determine whether your clients owe the 10% additional tax on early qualified plan distributions.

Clients should also file Form 5329 when they add too much to IRAs, education savings accounts or health savings accounts, or when they fail to take required minimum distributions, or RMDs, from IRAs or other qualified retirement plans.

The Planned Audit Scope

One question is whether the planned TIGTA Form 5329 compliance effort audit will focus only on taxpayers who have put too much cash into IRAs or taken withdrawals early.

The auditors could also look at compliance efforts related to Form 5329 filing enforcement requirements for HSA users and for retirement savers who are supposed to be taking required minimum distributions.

The History

TIGTA looked at IRS enforcement of Form 5329 reporting requirements for excess contributions to IRAs in 2015.

TIGTA found that taxpayer compliance with excess contribution reporting rules, and it recommended that the IRS do more to educate taxpayers and IRA providers about the reporting requirements.

That year, TIGTA also found that only five of 80 traditional IRA holders studied followed the RMD rules properly. Taxpayer errors led to 42 RMD rule violations, and IRA trustee failures led to 33 violations.

In 2020, TIGTA published a heavily redacted report that identified a high rate of problems in IRS enforcement of early retirement distribution tax requirements. The agency estimated that the IRS could have collected about $5.8 million in additional taxes from 5,450 taxpayers who did file Form 5329 but claimed exceptions from the early withdrawal tax that appeared to be wrong.

(Photo: Shutterstock)

Allison Bell

Think_Allison

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