If you have an individual retirement account (IRA), now is the time to make sure you have been complying with tax rules. The Internal Revenue Service (IRS) is going to start cracking down on individual retirement accounts in an effort to collect penalties from taxpayers who do not follow rules regarding maximum contributions and minimum distributions. According to an article in the Wall Street Journal, the crackdown is part of an attempt to collect millions of dollars in previously uncollected penalties.
Individuals are only allowed to contribute a certain amount to regular and Roth IRAs each year. For 2012, you can contribute the lesser of $5,000 or your taxable compensation for the year, plus an addition $1,000 if you are over age 50. If you paid more than is allowed, you may have to pay a penalty of 6 percent of the excess amount.
In addition, once you reach age 70½, you are required to start taking distributions from your IRA. If you don't take the required minimum distribution, you can be subject to a 50 percent penalty on the amount you should have withdrawn. The same penalty applies to inherited IRAs. There is no statute of limitations on the penalties, so if errors are made over subsequent years, the penalties can add up quickly.
It is unclear how the IRS will step up enforcement of the penalties. The IRS will report to the Treasury Department on October 15th on its strategies, which could include more paperwork and audits. According to the Wall Street Journal, in 2006 and 2007, the IRS failed to collect $286 million in penalties for missed withdrawals and contributions.
Individuals and financial planners need to look over their IRAs to make sure contributions and withdrawals have been made properly. If you have any errors, you should correct them immediately because delaying further only increases penalty and interest charges.
For more information from the Wall Street Journal, click here.
Reprinted with the permission of ElderLawAnswers.