How Does Irs Keep Track of Retirement Contributions
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IRS To Audit 401(k) Savers Who Contribute Too Much
Caution Sign - IRS Audit Ahead
We've written about the danger of overstuffing your Individual Retirement Account. Stiff penalties apply. Now the Treasury Inspector General for Tax Administrator is out with a report that suggests that some 401(k) workplace retirement plan savers are pushing the limits, saving more than what's allowed, costing the U.S. Treasury.
TIGTA's recommendation: bring lax employers and errant taxpayers into compliance. The IRS' response: It will beef up employer education and conduct targeted audits for taxpayers who appear to have excess 401(k) deferrals, especially those with multiple 401(k)s.
The TIGTA report found that the vast majority of taxpayers comply with 401(k) contribution limits. Still, some 401(k) plans don't have controls in place to prevent employees from exceeding the annual limits. And the bigger problem: Some taxpayers get tripped up when contributing to multiple 401(k) plans. Worse, some folks appear to be repeat offenders, having made excess contributions at least three years in a row.
Based on a sample of 2014 tax returns, TIGTA estimates that 1,400 taxpayers appeared to have gone over the limits when contributing to one 401(k) and would owe additional taxes of about $8 million if found to be noncompliant. And an estimated 13,200 taxpayers who contributed to multiple 401(k)s potentially exceeded the limits and would owe additional taxes of about $33 million.
To put this in perspective, note that 53 million taxpayers contributed almost $255 billion in 2014 to workplace retirement plans, including 401(k)s.
In 2014, 401(k) contribution limits were $17,500 (plus $5,500 allowed as "catch-up" contributions for workers 50-plus). Any amount over the tax-year limit is an excess contribution. If you catch the mistake and can withdraw the excess plus earnings by April 15 of the following year, you report the excess contribution as income for the year it was contributed, and you report the earnings as income in the year distributed. If you miss the April 15 deadline, the excess contribution is taxable income in the year of the contribution and then taxed again in the year it's distributed (doubly taxed, essentially a 100% penalty). The IRS has details on what happens when an employee has elective deferrals in excess of the limits here.
In some cases, TIGTA found that workers simply made reporting mistakes on their tax returns, such as entering the cost of their employer-sponsored health insurance (code DD in Box 12 on Form W-2) as a 401(k) contribution (code D in Box 12 of Form W-2).
Employers should check that they have the controls in place to stop employee contributions at the maximum limit each year. Employees should check their pay stubs towards year-end and at yea end and adjust if needed. This is especially important if you switch jobs and contribute to more than one 401(k) in one tax year. In that case, it's up to you to make sure that across all your 401(k)s, the amount you contribute (as an employee) doesn't exceed the elective deferral limits. For 2018, that's $18,500 (or $24,500 if you're 50 or older).
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How Does Irs Keep Track of Retirement Contributions
Source: https://www.forbes.com/sites/ashleaebeling/2018/10/30/irs-to-audit-401k-savers-who-contribute-too-much/
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