Low-Hanging Fruit | Tax Tip of the Week | No. 164

IRAs - The Next IRS Audit Target?

According to the Treasury Inspector General for Tax Administration, the government allows $260 million in taxes to go uncollected each year for missed IRA withdrawals and contributions that break the IRA rules.Why is this such a tempting target for the IRS?  Over 46 million U.S. households have a combined $4.9 trillion in IRA assets.  As one IRS expert stated, “this is low-hanging fruit.”Many taxpayers are susceptible to taxes and penalties simply because they don’t understand the myriad IRA rules.  The following are some of the more common mistakes taxpayers make:- Failure to withdraw.  When an IRA owner reaches age 70 ½ they must start taking Required Minimum Distributions (RMDs).  The penalty for not taking an RMD is 50% of the required distribution amount.- Inherited IRAs.  When you inherit an IRA the distribution rules are different.  A full discussion of the rules of inherited IRAs goes beyond the scope of this article.  The short answer, however, depends on whether it is a spouse or non-spouse who inherits the IRA and whether or not the owner of the IRA had begun taking RMDs or not.  It is important to note that if a non-spouse inherits a Roth IRA there is another set of distribution rules that must be considered.- Contributing too much.  Generally, an excess contribution to a traditional or Roth IRA  is any amount over $5,000 a year, or $6,000 a year if over 50 years old.  Any excess contributions not corrected before October 15 of the following year are subject to a 6% excise tax and taxes on any earnings.  It is important to remember that contributions are allowed only if you have earned income that exceeds the contribution amount.  Sometimes taxpayers have an excess contribution if they elect to file their tax return as Married Filing Separate instead of Married Filing Jointly.  This is because the maximum amount of earnings is only $10,000 when you file separately before you are phased-out of making a contribution.- Improper Rollovers.  If you move IRA assets from one account to another you have 60 days to complete the transaction.  If the rollover does not occur in that 60 day window then 100% of the balance becomes taxable.  It is typically best to make any rollovers a “trustee to trustee” transfer.  But even then, it is important to keep good records and make sure the transfer is done properly.IRA rules can become very tricky.  Be sure to give us a call if you have any questions or will be encountering any IRA issues.You can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504.  Or visit our website.

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