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Wyden Calls for IRS Action On 'Mega IRAs'

by Mike Godfrey, Tax-News.com, Washington

25 November 2014


US Senate Finance Committee Chairman Ron Wyden (D – Oregon) has insisted that the Internal Revenue Service (IRS) should implement the recommendations of a new Government Accountability Office (GAO) report on independent retirement accounts (IRAs) with very large account balances, also known as "mega IRAs."

The GAO found that, in the 2011 tax year (the most recent year available), an estimated 43 million taxpayers had IRAs with a total reported fair market value of USD5.2 trillion. While most Americans had a median IRA account balance of about USD21,000, approximately 600,000 taxpayers had accounts worth more than USD1m, and about 9,000 taxpayers had IRAs worth more than USD5m.

In its report, the GAO said that these more affluent taxpayers have the opportunity to invest in assets unavailable to most, such as non-listed shares of their newly formed companies, which are often initially valued very low and offer very high potential investment returns if successful. The GAO noted that these individuals investing in these assets using certain types of IRAs can escape taxation on investment gains.

In 2014, the GA calculated that the federal government will forgo an estimated USD17.45bn in tax revenue from IRAs, "which Congress created to ensure equitable tax treatment for those not covered by employer-sponsored retirement plans." It suggested that "the accumulation of these large IRA balances by a small number of investors stands in contrast to Congress's aim to prevent the tax-favored accumulation of balances exceeding what is needed for retirement."

The GAO pointed out that the IRS has enforcement programs covering specific aspects of IRA non-compliance, such as excess contributions and undervalued assets. It noted plans to collect data identifying non-publicly traded assets in IRA investments to help identify potential IRA non-compliance. IRS officials said, however, that IRA valuation cases are audit-intensive and difficult to litigate because of the subjective nature of valuation. It said the success of its efforts will depend on the resources available to it.

The IRS also noted that the three-year statute of limitations for assessing taxes owed can pose an obstacle to pursuing non-compliant activity over years of IRA investment.

The GAO has recommended that Congress should consider revisiting the legislation over the use of IRAs. It recommended that the IRS compile and digitize data on non-publicly traded IRA assets and seek an extension of the statute of limitations for IRA non-compliance.

In a statement, Wyden concluded: "The state of retirement savings in the US is completely out of whack. On one hand you've got people sheltering millions of dollars in mega IRAs, while at the same time nearly a third of Americans have nothing set aside for retirement. It's abundantly clear that America needs a better system and tax code that supports retirement planning for all Americans."

In a letter to the Treasury Department and the IRS on November 19, he encouraged the IRS to adopt the GAO's recommendations, which the agency had already largely accepted, and "requested the assistance of the IRS and Treasury in developing legislation to address valuation and compliance concerns."

During a previous hearing of the Committee in September this year, however, Orrin Hatch (R – Utah), who is currently its Ranking Member (but is expected to be its next Chairman), had expressed his concern that the Committee's discussions "would turn retirement policy into another front in the class warfare that consumes so much energy on some of the other committees in Congress."

Witness testimonies at the hearing had suggested that the inefficient targeting of retirement tax incentives is not the main problem. They instead called for simplified, lower-cost investment options and easier workplace access to retirement savings plans.

TAGS: individuals | compliance | Finance | tax | investment | pensions | tax compliance | tax incentives | law | retirement | Internal Revenue Service (IRS) | enforcement | ministry of finance | tax authority | United States | tax breaks | individual income tax

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