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Publications: TIGTA Finds Clarification of Form 1099-R Could Improve Taxpayer Compliance

February 7, 2012

TIGTA - 2012-4 David Barnes David.barnes@tigta.treas.gov TIGTACommunications@tigta.treas.gov (202) 622-3062

Publications: TIGTA Finds Clarification of Form 1099-R Could Improve Taxpayer Compliance

WASHINGTON – Even small improvements in the Internal Revenue Service’s (IRS)

examination of tax returns with retirement income could increase taxpayer compliance and

generate substantial revenue to the Federal Government, helping reduce the Tax Gap, according

to a new study released today by the Treasury Inspector General for Tax Administration.

TIGTA conducted its 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.

In a Tax Gap study for Tax Year 2001, the IRS estimated that as much as $4.2 billion of the Tax

Gap can be attributed to underreported retirement income. Due to the amount and volume of tax

assessments made, the Automated Underreporter (AUR) Program is one of the IRS’s more

successful compliance programs in increasing taxpayer awareness and contributing to the

reduction of the Tax Gap.

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 determined that the AUR Program is effectively determining the proper reporting of

retirement income when Form 1099-R, Distributions From Pensions, Annuities, Retirement or

Profit-Sharing Plans, IRAs, Insurance Contracts, etc., discloses the taxable amount of the

retirement distribution. For example, for Tax Year 2007, AUR Program examiners made tax

assessments totaling approximately $607.5 million on 217,811 tax returns. However, additional

tax form information, if available, would improve compliance.

TIGTA recommended that the Commissioner, Wage and Investment Division: 1) revise the

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 60 days as required, and 2) establish procedures

to transcribe additional lines from various tax forms.

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 60 days. However,

TIGTA maintains that this information would be useful to the AUR Program when taxpayers do

not utilize direct transfers between financial institutions.

The IRS plans to conduct its own study to determine the benefit of transcribing additional lines

from tax forms. TIGTA maintains that the cost to transcribe the forms would be nominal and

would not increase taxpayer burden.