Court filing
TIGTA Report 2021-16-044 — Taxpayers Notified About CARES Act Retirement Plan Provisions; Additional Noncompliance Actions Needed
Record facts
| Court | Treasury Inspector General for Tax Administration (TIGTA) |
|---|---|
| Filed | 2021-07-20 |
Summary
A final audit report of the Treasury Inspector General for Tax Administration, Report Number: 2021-16-044, issued July 20, 2021 to the Commissioner of Internal Revenue. It assesses IRS oversight of relief for early retirement distributions and Required Minimum Distributions under the CARES Act, Pub. L. No. 116–136: Section 2202 allowed coronavirus-related early distributions up to $100,000 without the early distribution tax, and Section 2203 waived Required Minimum Distributions for Tax Year 2020. It finds the IRS issued news releases, notices and a tax tip, created Form 8915-E and developed compliance plans for both sections. It recommends the Commissioner, Small Business/Self-Employed Division ensure sufficient information to assess Section 2202 compliance and consider creating a Lead Sheet, and reports that IRS management disagreed with both recommendations.
Summary drafted by a model from the document's text below and checked by script against that text before publication. It is a navigation aid, not a reading of what the document proves. Where AI is used
Full text
1
Taxpayers Were Notified About the CARES Act
Retirement Plan Provisions; However, Additional Actions
Could Be Taken to Identify Potential Noncompliance
July 20, 2021
Report Number: 2021-16-044
This report has cleared the Treasury Inspector General for Tax Administration disclosure review process and
information determined to be restricted from public release has been redacted from this document.
TIGTACommunications@tigta.treas.gov | www.treasury.gov/tigta
TREASURY INSPECTOR GENERAL FOR TAX ADMINISTRATION
HIGHLIGHTS: Taxpayers Were Notified About the CARES Act Retirement Plan Provisions;
However, Additional Actions Could Be Taken to Identify Potential Noncompliance
Final Audit Report issued on July 20, 2021
Report Number: 2021-16-044
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.
U.S. DEPARTMENT OF THE TREASURY
WASHINGTON, D.C. 20220
TREASURY INSPECTOR GENERAL
FOR TAX ADMINISTRATION
July 20, 2021
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).
Taxpayers Were Notified About the CARES Act Retirement Plan Provisions;
However, Additional Actions Could Be Taken to Identify Potential Noncompliance
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
Page 1
Taxpayers Were Notified About the CARES Act Retirement Plan Provisions;
However, Additional Actions Could Be Taken to Identify Potential 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.
Figure 1: Qualifications to be Eligible for Coronavirus-Related Distributions
CARES Act Qualifications
IRS Qualifications
•
The individual was diagnosed with the
coronavirus by a test approved by the
Centers for Disease Control and Prevention
(including a test authorized under the Federal
Food, Drug, and Cosmetic Act).
•
The individual’s spouse or dependent was
diagnosed with the coronavirus by a test
approved by the Centers for Disease Control
and Prevention (including a test authorized
under the Federal Food, Drug, and Cosmetic
Act).
•
The individual experienced adverse financial
consequences as a result of:
o
The individual being quarantined, being
furloughed or laid off, or having work
hours reduced due to the coronavirus.
o
The individual being unable to work due
to lack of childcare because of the
coronavirus.
•
The individual experienced adverse financial
consequences as a result of:
o
The individual having a reduction in pay
(or self-employment income) due to the
coronavirus, or having a job offer
rescinded, or having the start date for a
job delayed due to the coronavirus.
o
The individual’s spouse or a member of
the individual’s household being
quarantined, furloughed, or laid off or
having work hours reduced due to the
coronavirus; being unable to work due
to lack of childcare because of the
coronavirus; having a reduction in pay
(or self-employment income) due to the
coronavirus; or having a job offer
rescinded or start date for a job delayed
due to the coronavirus.3
o
The closing or reduced hours of a
business owned or operated by the
individual’s spouse or a member of the
1 Pub. L. No. 116–136, 134 Stat. 281.
2 Generally, distributions from retirement accounts before the taxpayer reaches the age 59½ are assessed a
10 percent additional tax. There are exceptions to paying the 10 percent additional tax.
3 A member of the individual’s household is someone who shares the individual’s principal residence.
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Taxpayers Were Notified About the CARES Act Retirement Plan Provisions;
However, Additional Actions Could Be Taken to Identify Potential Noncompliance
CARES Act Qualifications
IRS Qualifications
o
The closing or reduced hours of a
business owned or operated by the
individual due to the coronavirus.
individual’s household due to the
coronavirus.
Source: Notice 2020-50, Guidance for Coronavirus-Related Distributions and Loans from
Retirement Plans Under the CARES Act.4
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.
Section 2203
Section 2203 of the CARES Act waived Required Minimum Distributions (RMD) for taxpayers for
TY 2020.8 Normally, taxpayers who have reached age 72 are required to take RMDs annually.
These distributions are taxable income and should be reported on the taxpayer’s annual tax
return. If the taxpayer fails to take the RMD for a year, they are required to take the RMD as
soon as they can and are assessed a 50 percent tax on the RMD amount they failed to withdraw
on time.
4 IRS, Notice 2020-50, I.R.B. 2020-28 pp. 35–43 (July 6, 2020).
5 Any coronavirus-related distribution (whether from an employer retirement plan or an Individual Retirement
Arrangement (IRA)) paid to a qualified individual as a beneficiary of an employee or IRA owner (other than the
surviving spouse of the employee or IRA owner) cannot be recontributed. An IRA is a tax-favored personal savings
arrangement that allows you to set aside money for retirement.
6 Taxpayers have until the due date of the TY 2022 tax return to recontribute to IRAs.
7 There were 51 other declared disaster areas that qualify for tax relief in TY 2020.
8 The waiver of RMDs is for taxpayers who participate in Defined Contribution Plans and IRAs. A Defined Contribution
Plan is a retirement plan in which the employee and/or the employer contribute to the employee’s individual account
under the plan.
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Taxpayers Were Notified About the CARES Act Retirement Plan Provisions;
However, Additional Actions Could Be Taken to Identify Potential Noncompliance
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.
More Steps Can Be Taken to Identify Potential Noncompliance
Millions of taxpayers took coronavirus-related early retirement distributions and will have
corresponding requirements for reporting these distributions and paying applicable taxes.
However, the IRS could take more steps to ensure that taxpayers comply with these reporting
and tax payment requirements.
The total number of taxpayers who took coronavirus-related early distributions, and amounts
taken, are ******************************2***************************** However, reports from
investment management companies and another news source indicate that millions of taxpayers
took these distributions in TY 2020. Fidelity Investments, an investment management company,
reported at the end of TY 2020 that 6.3 percent of its participants (approximately 1.6 million)
took a coronavirus-related distribution, with an average distribution of $9,400.10 Vanguard,
9 A new Form 8915 is created each year to report distributions received for disasters that occurred in that year. For
example, Form 8915-E was created to report distributions received for disasters that occurred in TY 2020. Previous
year Form 8915 series are updated yearly to report the distributions that were elected to be reported over three years.
10 Fidelity Investments; Fidelity Q4 2020 Retirement Analysis: Despite Ongoing Economic Uncertainty as a Result of
the Pandemic, Contributions to Retirement Accounts Remained Strong, Helping Boost Account Balances to Records
Levels; https://www.businesswire.com/news/home/20210218005597/en/Fidelity%C2%AE-Q4-2020-Retirement-
Analysis-Despite-Ongoing-Economic-Uncertainty-as-a-Result-of-the-Pandemic-Contributions-to-Retirement-
Accounts-Remained-Strong-Helping-Boost-Account-Balances-to-Record-Levels (last visited May 19, 2021). The
median amount per distribution was $2,500. Taxpayers could take multiple coronavirus-related distributions. We
could not identify the average participant distribution.
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Taxpayers Were Notified About the CARES Act Retirement Plan Provisions;
However, Additional Actions Could Be Taken to Identify Potential Noncompliance
another investment management company, reported at the end of TY 2020 that 5.7 percent of
its participants took a coronavirus-related distribution, with an average participant distribution
of $24,600.11 Additionally, 4 percent of the Vanguard participants who took a distribution took
the maximum amount of $100,000. Furthermore, Government Executive reported that
119,720 Federal employees took $2.9 billion in coronavirus-related distributions from their
Thrift Savings Plan accounts, which is an average of more than $24,000 per participant.12
IRS management developed the Section 2202 Compliance Plan and the Section 2203
Compliance Plan to assess the impact the CARES Act retirement provisions would have on
examination activities and to outline the steps necessary to efficiently encourage and enforce
taxpayer compliance.13 In addition to informing taxpayers about the tax law changes associated
with the CARES Act retirement provisions, these compliance plans required the IRS to review its
processes and procedures to identify risks associated with the retirement provisions and the
need to update the Internal Revenue Manual.
The Section 2203 Compliance Plan did not identify any risks associated with the waiver of the
RMD. Noncompliance with RMDs is *****************2*************************** and
management took actions to inform examiners that the RMDs are not required in TY 2020 and
that they should not assess the 50 percent tax on taxpayers who did not take an RMD. IRS
management also updated the Internal Revenue Manual to include references to the
coronavirus-related early distribution rules and the waiver of RMDs in TY 2020.
The Section 2202 Compliance Plan identified two risks associated with taxpayer eligibility for and
reporting of early distributions:
1. Taxpayers may take a coronavirus-related distribution even though they do not qualify.
2. Taxpayers may not pay taxes on the full distribution when electing to pay it over
three years.
To mitigate risks associated with the early distributions, management ******2*******
*************************************************2**************************************************
If examiners identify significant errors and omissions ******************2**************************
the IRS has the option of pursuing a research project followed by a compliance initiative project,
if warranted.14 The Section 2202 Compliance Plan also recommended including details about
Section 2202 in examiners’ Fiscal Year 2021 Continuing Professional Education training.
11 Vanguard; Revisiting the CARES Act and its Impact on Retirement Savings;
https://institutional.vanguard.com/VGApp/iip/site/institutional/researchcommentary/article/InvComRevisitCARESActI
mpact (last visited May 19. 2021). Of Vanguard plan sponsors, 73 percent permitted their participants to access
retirement funds for coronavirus-related distributions. The median amount per participant was $13,300.
12 Government Executive; Wagner, Erich; Billions Flow Out of TSP Due to COVID, and More;
https://www.govexec.com/pay-benefits/2021/01/billions-flow-out-tsp-due-covid-and-more/171675/ (Jan. 27, 2021).
The Thrift Savings Plan (TSP) is a tax-deferred Defined Contribution Plan similar to private sector 401(k) plans that
provides Federal employees the opportunity to save for additional retirement security. A 401(k) Plan is a defined
contribution plan where an employee can make contributions from his or her paycheck either before or after tax,
depending on the options offered in the plan.
13 A compliance plan is a planning process that creates a prioritized list of compliance risks and issues that can be
addressed by the projected resource allocation.
14 Compliance initiative projects are authorized activities outside of the planned strategies involving taxpayer contact
for the purpose of correcting noncompliance that meet the mission, standards, and resources of the IRS.
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Taxpayers Were Notified About the CARES Act Retirement Plan Provisions;
However, Additional Actions Could Be Taken to Identify Potential Noncompliance
IRS management told us that Section 2202 training is being added to the Fiscal Year 2021
Continuing Professional Education training, and optional in-depth training is expected to be
available by August 2021.15 Additionally, they told us that they plan to add Section 2202
information to the Knowledge Management and Transfer program to increase tax examiner and
revenue agent awareness about coronavirus-related distributions risks.16 Small Business/
Self-Employed Division Counsel was still reviewing the information to be added to the
Knowledge Management and Transfer program at the time of our review.17
Although the Section 2202 Compliance Plan assessed the effect on examination activities and
outlined the steps necessary to encourage and enforce taxpayer compliance, *******2****
*************************************************2***************************************************
****************2********************* For example, it does not:
•
Establish objective criteria for the prevalence of errors and omissions that would warrant
a research project or a compliance initiative project.
•
*****************************************2***************************************************
*****************************************2***********************************************
•
Include aids for examiners to review potential noncompliance identified, such as the
creation of a Section 2202 Lead Sheet.18 Lead Sheets provide suggested issue-specific
audit steps during examinations.
Although the IRS employs a similar strategy to **********************2****************************
************************************************2****************************************** Since
2016, the President has declared more than 210 natural disaster areas with tax consequences;
however, **************************************2**************************************************
******************************2********************** The number of taxpayers who take a
coronavirus-related early retirement distribution has the potential to be substantially higher.
Unlike other natural disasters that generally are geographically restricted, Section 2202 applies
to taxpayers nationwide.
Additionally, Section 2202 does not require taxpayers to provide documentation supporting
their eligibility to take a coronavirus-related distribution, and ***************2***************
*************************************************2***************************************************
**********************2*******************************.19 For these reasons, we believe the risk of
noncompliance and abuse is potentially higher than it is for most other natural disasters. In
15 Information regarding coronavirus-related distributions is included in the Commerce Clearing House COVID
Stimulus Bills and Tax Reform Continuing Professional Education. Optional in-depth coronavirus-related distribution
Continuing Professional Education will also be available. The optional training is being created and is expected to be
written by the end of June 2021 and planned to be available by August 2021.
16 The Knowledge Manage and Transfer program uses a shared platform and standardized tools, resources, and
processes to more efficiently and effectively cultivate cross–Business Operating Division collaboration and knowledge
sharing. The program seeks to create a well-trained, flexible workforce that is equipped with the resources for
continual learning and growth.
17 A draft of the information was sent to Small Business/Self-Employed Division Counsel in April 2021. Once
approved by that Counsel and IRS management, the information will be posted to the website.
18 Issue Lead Sheets are used to document the adjustments, conclusions, audit steps, facts, laws, and taxpayer’s
positions for examined issues and to index and reference supporting workpapers.
19 Taxpayers selected for an examination may need to provide documentation regarding their eligibility for
coronavirus-related distributions.
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Taxpayers Were Notified About the CARES Act Retirement Plan Provisions;
However, Additional Actions Could Be Taken to Identify Potential Noncompliance
previous years, Examination allocated resources to review new legislation and emerging issues,
such as certain provisions of the Tax Cuts and Jobs Act, digital currencies and alternative
payment systems, the marijuana industry, and the gig economy.20 However, management has
not taken similar steps for early distributions pursuant to Section 2202.
Not all distribution types qualify for coronavirus-related tax relief.21 During the course of an
examination, if an examiner identifies a taxpayer who files Form 8915-E, they can review
Form 1099-R to determine if the taxpayer claimed a distribution that does not qualify for
coronavirus-related relief. Similarly, for TYs 2021 and 2022 returns, examiners could check
TY 2020 tax returns to identify taxpayers who took an early distribution but did not report the
income when they elected to spread it out over three years.
The Commissioner, Small Business/Self-Employed Division, should:
Recommendation 1: Ensure that management has sufficient information available to assess
compliance with Section 2202 of the CARES Act so that they can make a judgment about the
need for a research project or compliance initiative project. The reliability of such information
could be enhanced by ensuring assignment of a sufficient number of cases with
coronavirus-related distributions and criteria that would warrant further study.
Management’s Response: The IRS disagreed with this recommendation. Under the
CARES Act, taxpayers have until TY 2022 to pay the tax and TY 2023 to optionally repay
the distribution. ************************2***********************************************
*****************2************* The current Automated Underreporter program uses
Form 1099-R to systemically identify, match, ********2*********** select taxpayers that
have potentially taxable distributions. While some returns with early distributions will be
selected for examination as part of the IRS’s existing compliance processes, the early
distributions may or may not be coronavirus-related distributions. In addition, based on
the estimated amounts provided by the Treasury Inspector General for Tax
Administration, spread over a three-year period, ****************2*********************
****************************2************************ Limited examination resources
should not be diverted away from other priorities. Additionally, assessed amounts may
be difficult as this provision was enacted to mitigate financial hardship.
Office of Audit Comment: The CARES Act gives taxpayers the option to 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. Therefore, taxpayers must
report and pay at least a portion of the taxes on the distributions on their
TY 2020 tax return. Investment management companies and another news
source reported that millions of taxpayers took coronavirus-related distributions.
Without sufficient information, the IRS may have difficulty making a judgment
about the compliance risk for millions of tax returns, involving potentially billions
in distributions.
20 Pub. L. No. 115-97.
21 For more distributions that do not qualify for coronavirus relief, please see Appendix II, Distributions That Do Not
Qualify As Coronavirus-Related Distributions. These types of distributions also do not qualify for other
disaster-related distributions.
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Taxpayers Were Notified About the CARES Act Retirement Plan Provisions;
However, Additional Actions Could Be Taken to Identify Potential Noncompliance
Recommendation 2: Consider creating a Lead Sheet to assist examiners when reviewing cases
for potential noncompliance with Section 2202 of the CARES Act.
Management’s Response: The IRS disagreed with this recommendation, stating that it
**************************************2******************************************************
*****2**** Creating a new Lead Sheet is not an effective method to alert examiners to
new tax issues. In general, examiners only look for an issue Lead Sheet to identify audit
steps after they have already identified the tax issue.
Office of Audit Comment: A Lead Sheet for Section 2202 of the CARES Act
would assist examiners when reviewing returns with coronavirus-related
distributions for potential noncompliance. Like other Lead Sheets created for
other identified tax issues, it would include issue-specific audit steps to follow
during the examination.
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Taxpayers Were Notified About the CARES Act Retirement Plan Provisions;
However, Additional Actions Could Be Taken to Identify Potential Noncompliance
Appendix I
Detailed Objective, Scope, and Methodology
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 RMDs pursuant to the CARES Act. To
accomplish our objective, we:
•
Assessed the planned process for ensuring that taxpayers comply with the early
distribution provisions of the CARES Act and are not assessed the excise tax for failing to
take RMDs in TY 2020.
•
Obtained and reviewed all procedures and guidance for the implementation of the early
retirement distribution and RMD provisions of the CARES Act.
•
Interviewed IRS employees who will have the responsibility of implementing the early
distribution and RMD provisions of the CARES Act.
•
Obtained and reviewed educational materials shared with the public regarding the
coronavirus-related early distribution and waiver of the RMD for TY 2020.
•
Obtained and reviewed any training materials provided by the IRS to monitor tax returns
related to relevant distribution provisions of the CARES Act.
•
Determined if the IRS or third parties had any estimates of the number of taxpayers who
will file returns with early distributions pursuant to the CARES Act.
•
Determined how the IRS plans to identify and deter noncompliance by taxpayers who
decide to pay back coronavirus-related early distributions over the next three years.
•
Determined if there are instances for which the IRS can implement strategies to identify
fraudulent coronavirus-related early distributions.
Performance of This Review
This review was performed with information obtained from IRS personnel within the Small
Business/Self-Employed Division’s Operations Support and Examination functions and the Wage
and Investment Division’s Submission Processing; Operations Support; and Customer Assistance,
Relationships, and Education functions located in Washington, D.C., and Atlanta, Georgia, during
the period August 2020 through March 2021. We conducted this performance audit in
accordance with generally accepted government auditing standards. Those standards require
that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a
reasonable basis for our findings and conclusions based on our audit objective. We believe that
the evidence obtained provides a reasonable basis for our findings and conclusions based on
our audit objective.
Major contributors to the report were Heather Hill, Assistant Inspector General for Audit
(Management Services and Exempt Organizations); Carl Aley, Director; David Bueter, Audit
Manager; John Jarvis Jr., Lead Auditor; and Allison Sollisch, Senior Auditor.
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Taxpayers Were Notified About the CARES Act Retirement Plan Provisions;
However, Additional Actions Could Be Taken to Identify Potential Noncompliance
Internal Controls Methodology
Internal controls relate to management’s plans, methods, and procedures used to meet their
mission, goals, and objectives. Internal controls include the processes and procedures for
planning, organizing, directing, and controlling program operations. They include the systems
for measuring, reporting, and monitoring program performance. We determined that the
following internal controls were relevant to our audit objective: policies, procedures, and
practices related to the CARES Act retirement plan provisions and the Form 8915 series. We
evaluated these controls by reviewing source documents and interviewing IRS management and
employees.
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Taxpayers Were Notified About the CARES Act Retirement Plan Provisions;
However, Additional Actions Could Be Taken to Identify Potential Noncompliance
Appendix II
Distributions That Do Not Qualify
As Coronavirus-Related Distributions
•
Corrective distributions of elective deferrals and employee contributions that are
returned to the employee (together with the income allocable thereto) in order to
comply with the § 415 limitations.1
•
Excess elective deferrals under § 402(g).2
•
Excess contributions under § 401(k).3
•
Excess aggregate contributions under § 401(m).4
•
Loans that are treated as deemed distributions pursuant to § 72(p).5
•
Dividends paid on applicable employer securities under § 404(k).6
•
Costs of current life insurance protection.
•
Distributions of premiums for accident or health insurance under § 1.402(a)-1(e)(1)(i).7
•
Prohibited allocations that are treated as deemed distributions pursuant to § 409(p).8
•
Distributions that are permissible withdrawals from an eligible automatic contribution
arrangement within the meaning of § 414(w).9
1 26 United States Code § 415.
2 26 United States Code § 402.
3 26 United States Code § 401(k).
4 26 United States Code § 401(m).
5 26 United States Code § 72(p).
6 26 United States Code § 404(k).
7 26 Code of Federal Regulations § 1.402(a)-1(e)(1)(i).
8 26 United States Code § 409(p)(1).
9 26 United States Code § 414(w)(1).
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Taxpayers Were Notified About the CARES Act Retirement Plan Provisions;
However, Additional Actions Could Be Taken to Identify Potential Noncompliance
Appendix III
Management’s Response to the Draft Report
Page 12
Taxpayers Were Notified About the CARES Act Retirement Plan Provisions;
However, Additional Actions Could Be Taken to Identify Potential Noncompliance
Page 13
Taxpayers Were Notified About the CARES Act Retirement Plan Provisions;
However, Additional Actions Could Be Taken to Identify Potential Noncompliance
Page 14
Taxpayers Were Notified About the CARES Act Retirement Plan Provisions;
However, Additional Actions Could Be Taken to Identify Potential Noncompliance
Attachment
RECOMMENDATION 1: The Commissioner, Small Business/Self Employed Division,
should ensure that management has sufficient information available to assess
compliance with Section 2202 of the CARES Act so that they can make a judgment
about the need for a research project or compliance initiative project. The reliability of
such information could be enhanced by ensuring assignment of a sufficient number of
cases with coronavirus-related distributions, and criteria that would warrant further
study.
CORRECTIVE ACTION:
Under the CARES Act, taxpayers have until 2022 to pay the tax and 2023 to optionally
repay the distribution. ***********************************2*******************************
*********************2*********************. The current AUR program uses the Form 1099-
R to systemically identify, match, *********2********** select taxpayers that have
potentially taxable distributions. While some returns with early distributions will be
selected for examination as part of the IRS’s existing compliance processes, the early
distributions may or may not be coronavirus-related distributions. In addition, based on
the estimated amounts provided by TIGTA, spread over a three-year period, ***2**
*******************************************2*******************************************************
Limited examination resources should not be diverted away from other priorities.
Additionally, assessed amounts may be difficult to collect as this provision was
enacted to mitigate financial hardship.
IMPLEMENTATION DATE:
N/A
RESPONSIBLE OFFICIAL:
N/A
CORRECTIVE ACTION MONITORING PLAN:
N/A
RECOMMENDATION 2: The Commissioner, Small Business/Self Employed Division,
should consider creating a Lead Sheet to assist examiners when reviewing cases for
potential noncompliance with Section 2202 of the CARES Act.
CORRECTIVE ACTION:
This recommendation ******************************2*********************************
****************2******************* Creating a new lead sheet is not an effective method
to alert examiners to new tax issues. In general, examiners only look for an issue lead
sheet to identify audit steps after they have already identified the tax issue.
Page 15
Taxpayers Were Notified About the CARES Act Retirement Plan Provisions;
However, Additional Actions Could Be Taken to Identify Potential Noncompliance
Page 16
Taxpayers Were Notified About the CARES Act Retirement Plan Provisions;
However, Additional Actions Could Be Taken to Identify Potential Noncompliance
Appendix III
Abbreviations
CARES Act
Coronavirus Aid, Relief, and Economic Security Act
COVID-19
Coronavirus Disease 2019
IRA
Individual Retirement Arrangement
IRS
Internal Revenue Service
RMD
Required Minimum Distribution
TY
Tax Year
To report fraud, waste, or abuse,
call our toll-free hotline at:
(800) 366-4484
By Web:
www.treasury.gov/tigta/
Or Write:
Treasury Inspector General for Tax Administration
P.O. Box 589
Ben Franklin Station
Washington, D.C. 20044-0589
Information you provide is confidential, and you may remain anonymous.File and source
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