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IRA contributions and withdrawals: stepped-up scrutiny coming

Large bureaucratic agencies are seldom known for their vivid prose. The IRS is no exception.

Let's take a specific example that affects taxpayers in California and across the country. The IRS says it is about to embark on a major "compliance effort" on individual retirement accounts (IRAs). It doesn't take a genius to wonder whether this effort will amount to what in more colloquial speech would be called a crackdown.

It isn't difficult to see where the IRS is coming from in scrutinizing IRS transactions more carefully. In 2010, a report by the Treasury Inspector General for Tax Administration (TIGTA) called attention to the problem of uncollected taxes involving IRAs.

The TIGTA report found that in one recent two-year period, 2006-2007, the Treasury missed out on an estimated $286 million in tax revenue. The uncollected taxes were the result of excess contributions to IRAs and missed IRA withdrawals.

An excess contribution is a contribution of more than the maximum allowed in a given year. For 2013, that amount is $5,500, rising to $6,500 for someone who is 50 or over. The tax on the excess amount is supposed to be six percent of the amount above the limit.

Individual retirement accounts also contain a mandatory distribution feature that usually takes effect at age 70 ½. An IRA account holder is required to take out a certain percentage, which is called the "required minimum distribution." If the account holder does not do so, there may be tax liability of 50 percent of the amount that should have been distributed.

Two out of every five U.S. households have IRAs. So regardless of whether it's called a compliance effort or a crackdown, the increased IRS scrutiny of IRAs will affect a lot of people. Congressional leaders are concerned that taxpayers could make innocent mistakes concerning their IRAs. And those mistakes could end up costing them tax penalties.

Source: "The IRS Sets Its Sights on IRA Abuses," The Wall Street Journal, Kelly Greene, 4-5-13

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