Israel Calls on IRS to Adjust IRA Enforcement Policy

A new crackdown by the Internal Revenue Service on errors in reporting Individual Retirement Account tax information could result in seniors being hit with unfair fines, according to Rep. Steve Israel, D-Huntington.

Israel publicly called on the IRS Monday to make "common-sense changes to these IRS policies and an increased public education effort for seniors," according to his website.

A statement posted there describes the issue: 

"IRAs allow individuals to set aside savings for retirement tax free. According to the Investment Company Institute, two out of five U.S. households have IRA accounts. However, there are strict rules governing how these accounts must be handled. Individuals under 50 may only contribute up to $5,500 per year, while those 50 or older may contribute up to $6,500 per year. While those 59-and-a-half and older can withdraw money from their IRA as taxable income, penalty free, once an IRA owner reaches the age of 70-and-a-half, it is required that they start withdrawing from their IRA account. Contributing over the maximum amount could result in a penalty of six percent of the additional amount. Failure to withdraw from an IRA after the age of 70-and-a-half could result in penalties amounting to 50 percent of the amount that should have been withdrawn."

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The congressman sent a letter to the IRS in January requesting better public education about IRA rules and enforcement and reassessment of penalties triggered by honest mistakes, according to his office. No reply has been received.

"While I appreciate the IRS’ work to ensure that individuals are paying their taxes accurately, I also believe that we should not be unfairly penalizing taxpayers for mistakes they make unknowingly," Israel said. "The IRS’ push to crack down on those committing IRA withdrawal errors means that many seniors are facing unfair penalties and interest and owe money to the IRS they cannot afford to lose. That’s why I’m calling on the IRS to reassess this policy and make sure they are properly educating our seniors and the professionals who work with them so they can avoid these costly mistakes and keep the money they’ve worked so hard to save.”

Israel was joined by attorney and certified public accountant Seymour Goldberg, elder law attorney Ron Fatoullah and certified financial planner Henry Montag.

Goldberg said he has worked with seniors and their families who have been subject to strict financial penalties due to mistakes made on their accounts. He called it "imperative" that the IRS reassess its penalties and better inform seniors. 

Fatoullah agreed.

"This crackdown will affect our frail elderly and their retirement accounts that they hope to rely on as they age. These seniors are not criminals, but rather law abiding citizens who want to do the right thing, but who are simply not aware of the distribution rules,” he said.

Montag said many seniors don't work with a certified financial planner and are unaware of the rules. For those living on fixed incomes, the fines would exact a heavy toll.