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IRS Allows Millions in Questionable Self-employed Retirement Plan Deductions, IG Says

The Internal Revenue Service can do more to identify improper deductions for contributions the self-employed make to their simplified employee pension (SEP) plan retirement accounts. And it could bring in $71 million over five years if it does, says the Treasury Inspector General for Tax Administration (TIGTA) in a recently released report

Self-employed taxpayers may deduct such contributions on line 28 of their individual tax returns under certain circumstances. TIGTA was studying whether IRS controls and third-party data are adequate to verify that such deductions are proper. 

The IRS did agree that some actions can be taken to improve the existing processes, but disputed many of TIGTA’s findings and disagreed with many of its recommendations. 

IRS management did not agree that it was not doing enough to prevent and detect improper claims for deductions. Said IRS Commissioner, Wage and Investment Division, Peggy Bogadi in her response letter, “We disagree with the Treasury Inspector General for Administration’s conclusion that controls are not in place to detect potentially improper self-employed retirement plan deductions. Current procedures are in place to determine whether taxpayers claiming SEP deductions on the Form 1040 reported self-employment income on the tax return.” 

TIGTA and the IRS are at odds regarding the scope of the problems posed when claims for deductions are entered on the wrong line of tax returns and not on line 28. TIGTA argued that these errors cost revenue, but the IRS disputed that and Bogadi called them “inconsequential” placement errors. 

TIGTA said that the IRS should use third-party data to determine whether taxpayers are taking improper deductions. The IRS pushed back on this too, and did not agree that additional actions are necessary; it said that it already has a robust compliance program and that its examiners already have access to third-party data when reviewing returns to determine if they should be audited. 

The IRS did agree with TIGTA that action should be taken to determine whether taxpayers it identified who may have taken improper SEP plan deductions in tax year 2011 should be assessed additional taxes. The IRS said it will review those accounts and determine whether action needs to be taken. 

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John Iekel is Senior Writer and Editor for the ASPPA Net and NTSA Net web portals.