GAO Calls for Simplified IRA Rules

September 16, 2008 ( - A Congressional watchdog agency has recommended the Internal Revenue Service (IRS) simplify its IRA rules so more people can take advantage of the tax-sheltered savings vehicle.

Specifically, the Government Accountability Office (GAO) suggested the IRS clarify the rules under which taxpayers can make a combined contribution to a regular and a Roth IRA and that the IRS work with other federal agencies to pursue ways to help taxpayers comply with the required minimum distribution rule (taxpayers over age 70½ are required to take minimum distributions from traditional IRAs or face a 50% penalty on the required distribution amount). GAO also suggested the tax agency pursue ways to give taxpayers more general guidance

GAO researchers say many taxpayers are hamstrung in their ability to take maximum advantage of their IRA because of the rule confusion. “As partly shown by taxpayer misreporting to IRS, taxpayers face challenges in figuring how much they can contribute, navigating the various distribution rules, and rolling over their IRAs between custodians,” the GAO said.

Complexity of IRA rules was cited by IRS officials, IRA custodians, and financial planners as the overarching contributor to challenges facing taxpayers in complying with IRA rules, the GAO said.

On the basis of the most recent research results available, the IRS estimated that in 2001, nearly 15% of those who made traditional IRA contribution deductions misreported their deductions on their tax returns, and nearly 15% of taxpayers who took taxable distributions from traditional IRAs misreported this information.

The GAO said older taxpayers make mistakes in determining when they must start distributions and calculating the correct amount and said the IRS could develop a Web-based calculator to figure out the required minimum distribution. Other options to reduce the complexity of IRA rules, such as eliminating income limits on eligibility, pose tradeoffs and could be considered in the context of broader tax reform, the GAO said.

The report is available  here .