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TIGTA Examines IRS (in)Action on Excess IRA Contributions

Monday, May 11, 2015
excess IRA contribution report

By The Slott Report Staff

A new Treasury Inspector General for Tax Administration (TIGTA) report found that IRS hasn't done enough to address the problem of taxpayers making excess contributions to IRAs. The report suggested ways the agency could improve its outreach program for IRA custodians and its methodology for identifying non-compliant taxpayers.

What is an excess contribution?

  • any amounts contributed to traditional or Roth IRAs for the year that exceed the annual contribution limit (e.g., for 2015, $5,500 ($6,500 if age 50 or older));
  • any amount contributed to a traditional IRA by an individual who has reached age 70 1/2;
  • any amount contributed by an individual who does not earn eligible compensation.

Individuals who discover they have made excess IRA contributions can withdraw the excess amount out of their IRAs by the due date of the tax return without penalty.

Distributions resulting from excess contributions are reported by IRA custodians on Form 1099-R. There is a 6% excise tax associated with excess contributions not withdrawn by the due date of the tax return, including extensions. This 6% tax is reported by individuals on Form 5329.

IRA custodians must report information to IRS on Form 5498 and Form 1099-R, and must provide copies of the forms to IRA owners. A separate Form 5498 should be filed for each IRA held by an individual, and a separate Form 1099-R should be filed for distributions from each IRA or account held by an individual.

A TIGTA audit for fiscal year 2010 found that approximately 300,000 individuals potentially contributed more than $3.9 billion of unreported excess contributions to IRAs in tax years 2006 and 2007. The new report assessed the corrective steps IRS took to address the excess contributions problem and made suggestions of its own.