IRA Noncompliance on the Rise

The federal government is losing millions of dollars every year due to increasing taxpayer noncompliance with Individual Retirement Account requirements, according to a new government report.

The report, by the Treasury Department’s Inspector General for Tax Administration, found that hundreds of thousands of individuals are making excess contributions to their IRAs and not taking the required minimum distributions. In 2006 and 2007, individuals were allowed to contribute up to $4,000 per year to IRAs and $5,000 if they were age 50 or older. Excess contributions were subject to a 6 percent excise tax. However, many taxpayers do not follow these requirements.

An earlier TIGTA report in March 2008 found similar problems based on an analysis of 2005 IRS data. That report found that IRS processing procedures for IRAs do not ensure that individuals are complying with IRA rules and recommended several ways to address the problem.

In the new report, TIGTA reviewed the actions taken by the IRS to identify and correct individual excess contributions to IRAs and nondisbursements of required minimum distributions from IRAs, but discovered that over half a million people are not complying with the rules.

In the report released Friday, TIGTA found that 295,141 individuals made more than $1.5 billion in excess contributions to their IRAs in 2006 and 2007, resulting in an estimated loss of $94 million in excise tax and $17 million in income tax. In addition, TIGTA found that 255,498 individuals did not take the required minimum distributions totaling $348 million during that time, resulting in an estimated tax revenue loss of $174 million.

In response to TIGTA’s 2008 report, the IRS initiated four studies to analyze IRA compliance. The only completed study confirmed TIGTA’s 2008 findings and TIGTA believes the remaining three studies will also validate their findings on noncompliance.

“The IRS has yet to address the significant revenue losses associated with IRA noncompliance,” said J. Russell George, the Treasury Inspector General for Tax Administration. “Based on our analysis, noncompliance will likely grow and result in significant revenue loss.”

TIGTA recommended that the IRS develop a comprehensive strategy to address the growing noncompliance with limits on IRA contributions. The IRS agreed that such a strategy is necessary and plans to incorporate compliance, education and outreach components.