Treasury I.G. for Tax Administration: 'Taxpayers Were Notified About CARES Act Retirement Plan Provisions'

WASHINGTON, July 22 -- The Treasury Inspector General for Tax Administration issued the following audit report (No. 2021-16-044) on July 20, 2021, entitled "Taxpayers Were Notified About the CARES Act Retirement Plan Provisions; However, Additional Actions Could Be Taken to Identify Potential Noncompliance":

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Here are excerpts:

HIGHLIGHTS:

Why TIGTA Did This Audit

This audit was initiated to assess the IRS's efforts to implement the Coronavirus Aid, Relief, and Economic Security (CARES) Act provisions that provided economic relief to Americans. This included economic relief opportunities for taxpayers with retirement plans. The overall objective of this audit was to assess the IRS's efforts to oversee the relief from taxes associated with early retirement distributions and Required Minimum Distributions pursuant to the CARES Act.

Impact on Taxpayers

In March 2020, Congress passed the CARES Act. Section 2202 of the CARES Act allowed taxpayers to take coronavirus-related early distributions from their retirement plans, up to $100,000, without paying the early distribution tax. Additionally, Section 2203 of the CARES Act waived Required Minimum Distributions for taxpayers for Tax Year 2020.

What TIGTA Found

The IRS took a number of steps to oversee the retirement-related provisions of the CARES Act, including educating taxpayers and the development of high-level compliance plans to enforce taxpayer compliance with the provisions. For example, the IRS informed taxpayers about the CARES Act retirement provisions. This included creating and distributing various news releases, notices, and a tax tip to educate taxpayers of the new retirement provisions. Additionally, management developed compliance plans for Sections 2202 and 2203 to assess the impact on examination activities and outline the steps necessary to efficiently encourage and enforce taxpayer compliance. The Section 2202 Compliance Plan identified risks associated with taxpayer eligibility for and reporting of early distributions and recommended training examiners and monitoring examination work for taxpayer compliance to determine if additional study is warranted. The Section 2203 Compliance Plan did not identify any risks associated with the waiver of Required Minimum Distributions, but management took steps to notify examiners about the provision.

IRS management told us they are adding Section 2202 training to examiners' Fiscal Year 2021 Continuing Professional Education training, and they plan to add information to the Knowledge Management and Transfer program to increase tax examiner and revenue agent awareness about coronavirus-related distribution risks.

Reports from investment management companies and other news sources indicate that millions of taxpayers took coronavirus-related distributions in Tax Year 2020. Although the Section 2202 Compliance Plan assessed the effect on examination activities and outlined the steps necessary to encourage and enforce taxpayer compliance, it could be improved. For example, management could include objective criteria that would warrant a research project or a compliance initiative project.

Management could also ensure assignment of a sufficient number of cases involving coronavirus-related distributions or the creation of a Section 2202 Lead Sheet.

What TIGTA Recommended

TIGTA recommended that the Commissioner, Small Business/ Self-Employed Division, ensure that management has sufficient information available to assess compliance with Section 2202 of the CARES Act and consider creating a Lead Sheet to assist examiners when reviewing cases for potential noncompliance. In their response, IRS management disagreed with both recommendations. TIGTA believes these actions would help the IRS assess potential noncompliance and would assist examiners in reviewing returns with coronavirus-related distributions for potential noncompliance.

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MEMORANDUM FOR: COMMISSIONER OF INTERNAL REVENUE

FROM: Michael E. McKenney, Deputy Inspector General for Audit

SUBJECT: Final Audit Report - Taxpayers Were Notified About the CARES Act Retirement Plan Provisions; However, Additional Actions Could Be Taken to Identify Potential Noncompliance (Audit # 202110620)

This report presents the results of our review to assess the Internal Revenue Service's efforts to oversee the relief from tax associated with early retirement distributions and Required Minimum Distributions pursuant to the Coronavirus Aid, Relief, and Economic Security Act. This review is included in our Fiscal Year 2021 Annual Audit Plan and addresses the major management and performance challenges of Implementing Tax Law Changes and Responding to the COVID-19 Pandemic.

Management's complete response to the draft report is included as Appendix III.

Copies of this report are also being sent to the Internal Revenue Service managers affected by the report recommendations. If you have any questions, please contact me or Heather Hill, Assistant Inspector General for Audit (Management Services and Exempt Organizations).

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Table of Contents

Background ... Page 1

Results of Review ... Page 3

Management Took Steps to Notify Taxpayers About CARES Act Retirement Plan Provisions ... Page 3

More Steps Can Be Taken to Identify Potential Noncompliance ... Page 3

Recommendation 1: ... Page 6

Recommendation 2: ... Page 7

Appendices

Appendix I - Detailed Objective, Scope, and Methodology ... Page 8

Appendix II - Distributions That Do Not Qualify As Coronavirus-Related Distributions ... Page 10

Appendix III - Management's Response to the Draft Report ... Page 11

Appendix IV - Abbreviations ... Page 16

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Noncompliance

Background

In March 2020, Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act./1

The purpose of this legislation was to provide economic relief to Americans because of the Coronavirus Disease 2019 (COVID-19 or coronavirus) pandemic. Sections 2202 and 2203 of the Act provided economic relief opportunities for taxpayers with retirement plans. These opportunities were available only for Tax Year (TY) 2020 returns.

Section 2202

Section 2202 of the CARES Act allows taxpayers to take coronavirus-related early distributions from their retirement plans, up to $100,000, without paying the early distribution tax./2 The CARES Act provided qualifications for taxpayers to be eligible to take these early distributions, and the Internal Revenue Service (IRS) provided supplemental guidance. A taxpayer is eligible to take the early distributions if they meet any of the qualifications listed in Figure 1.

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[See link at end of text for Figure 1: Qualifications to be Eligible for Coronavirus-Related Distributions CARES Act Qualifications IRS Qualifications]

Source: Notice 2020-50, Guidance for Coronavirus-Related Distributions and Loans from Retirement Plans Under the CARES Act./4

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Taxpayers can claim the full distribution on their TY 2020 tax return as additional income, or they may report it in equal amounts over the next three years. For example, if a taxpayer takes a $15,000 coronavirus-related early distribution, they can report the full $15,000 as income on their TY 2020 tax return and pay any associated taxes, or they can elect to report $5,000 a year as income and pay the taxes owed on their TYs 2020, 2021, and 2022 tax returns. In either scenario, the additional 10 percent early distribution tax does not apply.

Taxpayers are not required, and have the option, to repay their retirement accounts for the early distribution./5

If they elect to repay it, they must do so within the three years./6

If they repay their early distribution, they are eligible to file an amended return(s) to request a refund for any income taxes they paid on the early distribution. The repayments do not count towards that year's retirement plan contribution limits, but taxpayers may not deduct repayments from their income.

Taxpayers report qualified coronavirus-related distributions on Form 8915-E, Qualified 2020 Disaster Retirement Plan Distributions and Repayments./7

If a taxpayer elects to spread the income over three years, they will need to file Form 8915-E with their return in each year. The total distributions and taxable portions of the distributions are included in the gross and taxable distribution amounts reported on the tax return(s). Third parties report distributions from retirement accounts to the IRS and taxpayers on Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. The coronavirus-related distributions should be reported on this form.

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Results of Review

Management Took Steps to Notify Taxpayers About CARES Act Retirement Plan Provisions

One of the IRS's strategic goals is to empower and enable all taxpayers to meet their tax obligations by being proactive with communications to taxpayers and tax professionals. In addition, taxpayers have the right to know what is required to comply with the tax laws. They are entitled to clear explanations of the laws and IRS procedures in all tax forms, instructions, publications, notices, and correspondence.

The IRS took a number of steps to oversee the retirement-related provisions of the CARES Act, including educating taxpayers and the development of high-level compliance plans to enforce taxpayer compliance with the provisions. For example, the IRS informed taxpayers about the CARES Act retirement provisions. This included creating and distributing various news releases, notices, and a tax tip to educate taxpayers of the new retirement provisions. The guidance described the qualifications for taking a coronavirus-related distribution, the tax consequences, and the repayment options. The IRS also educated taxpayers on RMD rules, including the waiver of TY 2020 RMDs and potential repayment options for RMDs already taken in TY 2020. Finally, the IRS created Form 8915-E for taxpayers to be able to claim the coronavirus-related distribution on their tax return./9

The IRS's actions should help taxpayers and tax professionals comply with the retirement-related provisions of the CARES Act.

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View full report at https://www.treasury.gov/tigta/auditreports/2021reports/202116044fr.pdf