The dreaded tax man is about to make life difficult for people who don't take the required minimum distributions (RMD) from their retirement accounts, which typically starts at age 70, and for IRA investors who may be socking away more in tax-free savings than they're allowed.
The crackdown on IRA errors by the Internal Revenue Service is part of an effort to bring in millions of dollars in tax penalties that go uncollected each year, reports smartmoney.com.
Some 46 million U.S. households hold IRA assets. If you're one of them, tread carefully.
The IRS will report to the Treasury Department by Oct. 15 on how it plans to go after taxpayers who make contribution or withdrawal errors, the report says.
"It's a wake-up call for anyone who has an IRA," says Martin Censor, a manager at the American Institute of Certified Public Accountants, was quoted as saying. "The government needs money. This is low-hanging fruit."
Generally, IRA owners must start taking their required withdrawals from traditional IRAs by April 1 of the year after they turn 70 . The tax penalties for those who fail to do that are harsh: It can cost 50 percent of the amount they should have withdrawn.
Likewise, those who stash away more in an IRA than they're permitted -- 2012 contribution limits are $5,000 per person, or $6,000 for people 50 or older -- can be hit with a penalty of 6 percent of the amount that was over the limit.
Arthur Elkin, a 60-year-old retiree, says he didn't realize he and his wife had made excess contributions to their Roth IRAs for seven years until he started working with a new accountant. The couple had to file amended tax returns, withdraw the contributions and pay thousands of dollars in penalties and interest, they told smartmoney.com.
In a review of cases in 2010, the IRS found that nearly 300,000 people made excess contributions to their accounts, totaling nearly $1.6 billion, in the tax years 2006 and 2007 .
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