IRS IRA oversight to be increased
Following article in WSJ is self explanatory. There obviously are major gaps in enforcement due to antiquated computer matching within the IRS. Perhaps this initiative will also result in the updating of the internal IRS matching capability that has allowed many of these errors to go undetected for years. Obviously, the title of the article is misleading, since the rules have been around for years. They are not trickier, just more likely to be enforced:
http://online.wsj.com/article/SB1000142405270230444140457748069044026632…
Permalink Submitted by mk foss on Sat, 2012-06-23 00:44
There are some items in the article that I’ve seen or heard about.
Apparently Profx one of the largest tax preparation software companies failed to include page 2 of Form 8606 for 2010 returns in the electronic files. They notified their customers too late to stem all of the IRS notices that went out. Without page 2 IRS expected that the entire conversion would be reported on the 2010 return.
IRA rollovers to HSAs also generated notices. It’s a fairly unusual transaction and the IRS computers apparently had trouble with it.
A client brought in a notice today for her 2010 return. IRS said that she hadn’t reported Pension income on her return.The description on the notice says:
SSN 5xx-xx-xxxx Form 10994-R Acct: 2010xxxx Distribution Code G
Distribution Code G means tax-free rollover – an obvious glitch in the system.
I’ve filed waiver requests for taxpayers who missed RMDs and they have always gone well – sometimes it takes an additional letter to show what was included on the original return. I’ve never seen a notice on a missed RMD (potenital 70% penalty) except for those when IRS did not notice the waiver request on the self-reported shortfall.
Permalink Submitted by Jose Morales on Mon, 2012-06-25 16:27
I’m glad the IRS is making this move. Hopefully it will make financial institutions, CPAs, financial advisors and anyone else who works with retirement accounts realize that it is their job to know the proper way to conduct these transactions. The days of the wild wild west with regards to retirements accounts needs to end.
Permalink Submitted by Jose Morales on Mon, 2012-06-25 17:25
With regards to Distribution Code G on a 1099-R, it is used incorrectly so frequently that I feel it is time that it is scrutinized. The IRS should never have adopted the practice of simply not looking closely or not requiring some form of backup when Distribution Code G is used.
Permalink Submitted by Alan Spross on Mon, 2012-06-25 18:25
The 1099R Inst indicate that Code G is to be used for direct rollovers, but these are not all tax free. Rollovers to Roth IRAs and inherited Roth IRAs from qualified plans are supposed to use the G coding, but the taxable amount is also supposed to be entered in Box 2a.
There have been several reported cases of a direct rollover FROM an IRA to a qualified plan showing Code G, and the IRS apparently will question the transaction unless a clear explanatory statement is made indicating the destination of the direct rollover. The IRS probably feels that the distribution might have gone to a Roth IRA, but they did not get a 5498, and of course qualified plans do not issue 5498 forms.