Individual Retirement Accounts: Additional IRS Actions Could Help Taxpayers Facing Challenges in Complying with Key Tax Rules
Highlights
Individual retirement accounts (IRA) allow individuals to save for retirement in a tax-preferred way. Traditional IRA contributions, subject to certain limitations, can be deducted from taxable earnings and taxes on earnings are deferred until distribution. In contrast, Roth IRA contributions are made after tax and distributions are tax-free. Faced with a myriad of rules covering IRA contributions and distributions, taxpayers may fail to comply with the rules. GAO was asked to (1) provide an overview of key rules and describe how the Internal Revenue Service (IRS) educates taxpayers about these rules, (2) describe what IRS knows about the extent of noncompliance with IRA transactions reported on taxpayer returns, and (3) describe challenges taxpayers face with key rules and some options for strengthening compliance. GAO reviewed IRS documents and compliance data. To identify challenges, GAO interviewed officials from the financial industry and advisor representatives.
Recommendations
Recommendations for Executive Action
| Agency Affected | Recommendation | Status |
|---|---|---|
| Internal Revenue Service | To help address the challenges facing taxpayers in complying with IRA rules, the Commissioner of Internal Revenue should clarify guidance and outreach materials to help taxpayers better understand that the combined IRA contribution limit applies across all traditional and Roth IRAs. |
Closed – Implemented
On October 30, 2008, IRS posted on their employee plans website a chart describing information about traditional and Roth IRA combined contribution limits and the deductibility of traditional IRA contributions. The 2008 Publication 590 included a new reminder at the beginning of the publication about the combined contribution limit, which the 2009 Publication 590 also includes.
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| Internal Revenue Service | To help address the challenges facing taxpayers in complying with IRA rules, the Commissioner of Internal Revenue should identify administrative options to improve compliance with the minimum required distribution rule, including additional taxpayer guidance or information reporting, and work in consultation with Treasury on regulatory or legislative strategies to strengthen compliance with the rule. |
Closed – Implemented
IRS has taken several actions to educate taxpayers on how to comply with Required Minimum Distribution (RMD) rules for individual retirement accounts (IRA). IRS created simplified worksheets that taxpayers may use to calculate the RMD amount for IRA and retirement accounts, and posted these worksheets to their employee plans website on October 23, 2008. On October 27, 2008, IRS updated and simplified the list of Frequently Asked Questions (FAQs) about RMDs on their employee plans website. These FAQs include information on when individuals should begin to take RMDs, how to calculate the RMD amount, and refers to the Publication 590 for more information about RMDs. Since March 2008, IRS has addressed RMDs in the ongoing Question and Answer series published in of its quarterly Employee Plan Newsletters (Employee Plans News and Retirement News for Employers); IRS plans to continue to address these topics in future editions of both newsletters. In February 2012 as part of the President's fiscal year 2013 budget, the Department of the Treasury, in consultation with the IRS, proposed two legislative strategies to exempt some IRA owners from RMD rules and improve compliance for inherited IRAs. The first proposal would exempt individuals with aggregate IRA and retirement plan balances not exceeding $75,000 from RMD rules; the proposal is effective for IRA owners attaining age 70 1/2 after December 31, 2012. The second proposal would allow 60-day rollovers for all inherited IRAs. Differing rollover rules for spouse and non-spouse beneficiaries confused plan administrators and beneficiaries and had been a source of inadvertent noncompliance.
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