Form 1099-R Improvement Could Lead to Enhanced Compliance

Form clarification could provide billions toward closing the tax gap.

Richard R. Hammar, Attorney, CPA
Bio
Church Finance Today

Form 1099-R Improvement Could Lead to Enhanced Compliance

Form clarification could provide billions toward closing the tax gap.

Richard R. Hammar

Generally, distributions from pensions, annuities, profit-sharing and retirement plans, IRAs, and insurance contracts are reported to recipients on Form 1099-R. Many churches and church pension plans have difficulty completing this form, and this difficulty is compounded in the case of ministers who receive a housing allowance.

The Treasury Inspector General for Tax Administration (TIGTA) conducted a review to determine whether the IRS has effective controls and processes in place to ensure that taxpayers and retirement income providers are correctly computing and reporting the taxable portion of retirement income on Form 1099-R. TIGTA estimated that as much as $4.2 billion of the “tax gap” (the difference in taxes paid and taxes owed) can be attributed to underreported retirement income.

TIGTA found that, given the magnitude of underreporting, even small improvements in the IRS’s examination of tax returns with retirement income could increase taxpayer compliance and generate substantial revenue to the federal government to reduce the tax gap.

“Our report found that correctly reporting taxable amounts of retirement distributions on Form 1099-R can be confusing for taxpayers,” said J. Russell George, Treasury Inspector General for Tax Administration. “By implementing TIGTA’s recommendation to clarify the form, the IRS can reduce taxpayer confusion and improve compliance,” he added.

TIGTA recommended that the IRS revise Form 1099-R to clarify the meaning of the “taxable amount not determined” box in order to reduce taxpayer confusion and include the dates needed to identify retirement savings program distributions and transfers not rolled over within sixty days as required.

The IRS substantially agreed with TIGTA’s recommendations and plans to revise the instructions to Form 1099-R to clarify taxpayer responsibilities and the amounts to report. 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 sixty days.

This article first appeared in Church Finance Today, May 2012.

Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.

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