Posts Tagged ‘retirement’

If you’re nearing retirement age, I’m hoping you’ve spent your entire career socking away money into a 401(k) fueled by sound, cautious investment decisions, steering clear of the risky, get-rich-quick options favored by my generation.    

/Shakes fist at jar of magic beans on dresser

But while you’re kicking back and enjoying the fruits of your labor, be warned that your tax troubles aren’t over. Properly reporting the taxable portion of your retirement proceeds has become increasingly challenging, often causing taxpayers to unknowingly understate taxable income.

In a report issued this week by the Treasury Inspector General for Tax Administration (TIGTA), it was disclosed that the IRS has estimated that underreported retirement income added $4.2 billion to the tax gap in 2001.

There is tremendous motivation for the IRS to take steps to increase compliance, as the amount of retirement income reported annually is staggering. In 2008 and 2009, taxpayers filed approximately 21 million tax returns with taxable IRA income totaling $293 billion and approximately 52.2 million tax returns with taxable pension income totaling $1 trillion.

To catch underreporting with minimal manpower, the IRS uses its Automated Underreporter (AUR) Program to match amounts reported on Form 1040 to what was reported as paid to taxpayers from third parties such as employers, banks, brokers, and other financial institutions on Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. If a mismatch is identified, the IRS issues a notice to inform the taxpayer that he may have underreported income. For  2007,  AUR Program examiners made tax assessments totaling approximately $607.5 million on 217,811 tax returns.

Despite the success of the AUR Program, the TIGTA report concluded that compliance could still stand to improve, citing the complexities taxpayers face in properly reporting the information disclosed on Form 1099-R:

We determined taxpayers receive Forms 1099-R from payers with the following contradictory or confusing information regarding the amount of taxable retirement income to put on their tax returns:

• A Form 1099-R with a taxable amount but also having the box checked indicating the “taxable amount could not be determined.” For some retirement income plans, the Form 1099-R instructions require the payer to complete the form in this manner. Our  analysis of 14.9 million Forms 1099-R with a distribution identified 11.5 million  (77.2 percent) that had taxable amounts totaling $107.5 billion, but the taxable amount not determined box was checked.

• A Form 1099-R with a gross distribution amount but the taxable amount was left blank. Our analysis of 14.9 million Forms 1099-R with a distribution identified 3.4 million (22.8 percent) had gross distributions totaling $67 billion, but the taxable amount was left blank.

To resolve these issues, the TIGTA report made the following recommendations:

1) Revise the Form 1099-R to clarify the meaning of the” taxable amount not determined” box in order to reduce taxpayer confusion, and

2) Include the dates needed to identify retirement savings program distributions that were not rolled over within the required 60 days.

The IRS agreed with the report’s first recommendation and plans to revise the instructions to Form 1099-R to clarify taxpayer responsibilities and the amounts to report. With regards to the second recommendation, the IRS plans to consider the feasibility and the benefits of including the dates of distributions and their respective contributions to identify distributions not rolled over within 60 days, but as of now, no changes are planned.

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