Fixes to Form 1099-R Could Boost Compliance, Inspector General Says

Changes to IRS tax form 1099-R could eliminate taxpayer confusion, improve compliance, and generate "substantial" revenue for the federal government, according to a report released Tuesday by the Treasury Inspector General for Tax Administration (TIGTA) - "Opportunities Exist to Identify More Taxpayers Who Underreport Retirement Income."

In its audit, TIGTA determined that taxpayers are faced with contradictory information, which may be responsible for underreporting the taxable portion of retirement income to the tune of $4.2 billion overall, the IRS estimates.

The report said that the IRS Automated Underreporter (AUR) Program matches the Form 1099-R received from the payer who issued the distribution to the amount of retirement income reported on the recipient's tax return. Through this process, it can be determined if the taxpayer reported the correct amount of retirement income. Additional tax form information could improve compliance even more, the report said.

The report states:

"We determined taxpayers receive Forms 1099-R from payers with the following contradictory or confusing information regarding the amount of taxable retirement income to put on their tax returns:

· "A Form 1099-R with a taxable amount but also having the box checked indicating the taxable amount could not be determined. For some retirement income plans, the Form 1099-R instructions require the payer to complete the form in this manner. Our analysis of 14.9 million Forms 1099-R with a distribution identified 11.5 million (77.2 percent) that had taxable amounts totaling $107.5 billion, but the 'Taxable amount not determined' box was checked.

· "A Form 1099-R with a gross distribution amount but the taxable amount was left blank. TIGTA analysis found that 3.4 million (22.8 percent) had gross distributions totaling $67 billion, but the taxable amount was left blank."

TIGTA recommended that the IRS clarify the meaning of the "taxable amount not determined" box to lessen confusion and "include the dates needed to identify retirement savings program distributions and transfers not rolled over within sixty days as required." In addition, TIGTA recommended the IRS establish procedures to transcribe additional lines from various tax forms.

TIGTA said the IRS "substantially agreed" with its recommendations and plans to revise the instructions to Form 1099-R to clarify taxpayer responsibilities and the amounts to report. The IRS plans study the benefit of transcribing additional lines from tax forms. TIGTA, however, believes the cost to transcribe the forms would be nominal.