A September 30 report from the Treasury’s Inspector General for Tax Administration (TIGTA) finds that millions of taxpayers are not paying the ten percent early withdrawal penalty tax or income taxes owed on pre-retirement early withdrawals from their retirement savings plans. This raises the specter of Congressional review of proposals for tougher enforcement.
The report analyzed tax returns from 2021. TIGTA said, “Approximately 2.8 million taxpayers who received early distributions of approximately $12.9 billion did not pay the additional ten percent tax and did not file Forms 5329. These taxpayers could be subject to approximately $1.29 billion in additional taxes and/or approximately $322 million in Form 5329 failure to file penalties.” The report noted that because of the failure to file Form 5329, which allows for noting exceptions to imposition of the penalty tax, the amount of unpaid tax could be lower than the $1.29 billion TIGTA estimated. Some 2.3 million of the 2.8 million taxpayers who received early distributions did not properly report $11.4 billion in early distributions as taxable income, TIGTA said, with 880 of them receiving distribution amounts in excess of $200,000.
Prospects: This report raises a real possibility that lawmakers focused on tax and ERISA retirement savings issues will take a close look at retirement savings withdrawal rules in general. It is too soon to tell if this will grow into a real issue, but it seems possible, if not probable, given the amount of revenue that is lost from under-reporting (and under-paying) early withdrawal penalty taxes as well as income taxes.
This is an entirely separate issue from the one involving whether a taxpayer can aggregate minimum required distributions (MRDs) from multiple retirement savings plans, but both issues involve reporting requirements and penalties. So, it is possible that as the issue develops, the scrutiny will expand to include consideration of reforming the MRD aggregation rules.
NAIFA Staff Contact: Jayne Fitzgerald – Director – Government Relations, at jfitzgerald@naifa.org.