IRS Lacks Budget to Better Educate Taxpayers on IRA Minimum Distribution Rules

A new government report urges the Internal Revenue Service to do a better job of educating and notifying taxpayers about provisions of the tax code requiring them to begin taking minimum distributions from their Individual Retirement Arrangements when they reach a certain age, but the IRS responded that it lacks enough money in its budget to do so.

The report, from the Treasury Inspector General for Tax Administration, noted that taxpayers are required to begin withdrawing a minimum amount from certain types of IRAs when they reach age 70½. When taxpayers do not make these withdrawals, a loss of tax revenue occurs.

In previous audits, TIGTA has recommended that the IRS develop a strategy to address retirement provision noncompliance. In addition, there is congressional interest in educating taxpayers with respect to IRA provisions and not unreasonably penalizing them for innocent mistakes.

In its review, TIGTA found that, in response to prior TIGTA recommendations, the IRS has developed a broad-based strategy that focuses on educating taxpayers and individuals about IRA rules and notifying potentially noncompliant taxpayers of the minimum distribution requirement, a significant improvement from TIGTA’s prior reporting. However, the IRS could also take steps to improve its strategy, TIGTA found.

TIGTA recommended that, going forward, the IRS should consider directly communicating with taxpayers required to take a distribution and informing them about the distribution rules, using easily understood language. If the notice program is expanded, TIGTA recommended the IRS should modify the methodology for the required minimum distribution notices to identify additional noncompliant individuals.

"Taxpayers who do not begin taking minimum distributions from their Individual Retirement Arrangements when they reach age 70½ may simply be unaware of their statutory obligation to do so," said TIGTA Inspector General J. Russell George in a statement. "By clearly communicating with taxpayers required to take a distribution and informing them about the distribution rules, the IRS can raise taxpayer awareness, help them avoid the significant penalties associated with noncompliance, and prevent a loss of revenue to the government."

In response to the report, IRS officials partially agreed with the first recommendation and agreed with the second recommendation. The IRS stated that it recently added small business IRAs to its sample notice population. However, due to budget limitations, the IRS said it is not expanding its use of notices. In addition, the IRS agreed that direct communication with taxpayers reaching the age of 70½ would be helpful, but it is not implementing this program due to budget constraints.

“We agree that a direct notification process for taxpayers approaching the age of 70½ years would be helpful in educating them and informing them of their pending RMD requirements; however, limited budgetary resources significantly constrain our ability to devote the human and automation resources necessary to implement such a process and, more significantly, to devote requisite compliance resources to address those taxpayers who remain noncompliant,” said Debra Holland, commissioner of the IRS’s Wage and Investment Division.

The IRS did not agree to inform estates of distribution rules associated with IRA inheritances. “The custodians of IRAs are required to follow the instructions of the most recent beneficiary designation when disbursing IRAs of decedents,” Holland wrote. “The beneficiary designation is filed with the custodian and is not information available to the IRS.”

TIGTA said it continues to believe it would be beneficial to inform estates of inherited distribution requirements.

National Taxpayer Advocate Nina Olson described in her midyear report to Congress on Wednesday the impact of the budget cuts at the IRS in recent years on taxpayer service (see Taxpayer Advocate Finds 300,000 Taxpayers Overpaid IRS for Obamacare). The IRS answered only 37 percent of taxpayer calls routed to customer service representatives overall, and the hold time for taxpayers who got through averaged 23 minutes. This level of service represents a sharp drop-off from the 2014 filing season, when the IRS answered 71 percent of its calls and hold times averaged approximately 14 minutes. The IRS answered only 45 percent of calls from practitioners who called the IRS on the Practitioner Priority Service line, and hold times averaged 45 minutes.

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