The Treasury Inspector General, reviewed the IRS's tax review procedures, and examined hundreds of retirement plan contributions reported by self-employed individuals on line 28 of the Form 1040.
The Treasury Inspector General found no corresponding Self Employment Schedule C, E, or F as a basis for the SEP retirement contributions.
A Simplified Employee Pension (SEP) is a retirement plan that permits self-employed taxpayers to make contributions toward their own retirement without getting involved in a more complex qualified plan.
With a SEP, a self-employed taxpayer makes contributions to a traditional Individual Retirement Arrangement (IRA).
SEPs are created by Employers by completing a formal written document that provides benefits to the business owners.
The document requirement is satisfied by adopting an Internal Revenue Service (IRS) model SEP using Form 5305-SEP, "Simplified Employee Pension - Individual Retirement Accounts Contribution Agreement.
" SEP IRAs are required to be trusteed by financial institutions (or other entities approved by the IRS) serving as third-party trustees.
These institutions annually notify employers, and the IRS of contributions made to SEP IRAs via Form 5498, IRA Contribution Information.
The Inspector General's analysis of Forms 5498 for the 2011 tax year found "more than 207,000 taxpayers had SEP contributions totaling $1.
7 billion".
Self-employed taxpayers claim the deductions for contributions to their own SEP, or other qualified retirement plans on line 28 of Form 1040, U.
S.
Individual Income Tax Return.
"To be eligible for a deduction for contributions to their own retirement plans, taxpayers must be self-employed.
" A self-employed taxpayer's compensation (net earnings) should be reported on a Form 1040, Schedule C, ""Profit or Loss From Business" (Sole Proprietorship), Schedule E, "Supplemental Income and Loss", or Schedule F, "Profit or Loss From Farming".
For contributions to their own SEP plan account, business owners take a deduction on line 28 of Form 1040.
For SEPs, the deduction on line 28 is limited to the smaller of a maximum contribution amount or 25 percent of the self-employed business owner's net earnings.
The Inspector General's review pinpointed the IRS's lack of adequate controls for providing reasonable assurance SEP deductions intended for self-employed taxpayers were accurate and the amounts deducted were consistent with amounts reported on Form 5498 submitted by trustees and financial institutions.
Also reviewed was how controls over SEP deductions affected other self-employed retirement plan deductions on line 28 of Form 1040.
The Wage and Investment Division of the IRS is responsible for tax returns claiming deductions on Form 1040, line 28, for contributions to a SEP retirement plan account.
The W&I Division checks for errors or incorrect refunds when it processes individual tax returns.
In addition, the W&I Division is responsible for the Automated Underreporter (AUR) program that uses outside data to identify taxpayers who have misstated entries on previously processed tax returns.
By following up on identified inappropriate deductions, the IRS could reasonably have expected more than $14 million in revenue for 2011.
Also, with improved controls for future self employed tax return processing, the IRS could generate more than $71 million in subsequent revenue over the next five years.
The IRS replied to the Inspector General's recommendations with increased scrutiny and examinations of self-employed business owners' tax returns.
Self-employed business owners should review their 2011-2013 tax returns to make sure a Schedule C was attached to justify any Form 1040 SEP contributions.
The Treasury Inspector General found no corresponding Self Employment Schedule C, E, or F as a basis for the SEP retirement contributions.
A Simplified Employee Pension (SEP) is a retirement plan that permits self-employed taxpayers to make contributions toward their own retirement without getting involved in a more complex qualified plan.
With a SEP, a self-employed taxpayer makes contributions to a traditional Individual Retirement Arrangement (IRA).
SEPs are created by Employers by completing a formal written document that provides benefits to the business owners.
The document requirement is satisfied by adopting an Internal Revenue Service (IRS) model SEP using Form 5305-SEP, "Simplified Employee Pension - Individual Retirement Accounts Contribution Agreement.
" SEP IRAs are required to be trusteed by financial institutions (or other entities approved by the IRS) serving as third-party trustees.
These institutions annually notify employers, and the IRS of contributions made to SEP IRAs via Form 5498, IRA Contribution Information.
The Inspector General's analysis of Forms 5498 for the 2011 tax year found "more than 207,000 taxpayers had SEP contributions totaling $1.
7 billion".
Self-employed taxpayers claim the deductions for contributions to their own SEP, or other qualified retirement plans on line 28 of Form 1040, U.
S.
Individual Income Tax Return.
"To be eligible for a deduction for contributions to their own retirement plans, taxpayers must be self-employed.
" A self-employed taxpayer's compensation (net earnings) should be reported on a Form 1040, Schedule C, ""Profit or Loss From Business" (Sole Proprietorship), Schedule E, "Supplemental Income and Loss", or Schedule F, "Profit or Loss From Farming".
For contributions to their own SEP plan account, business owners take a deduction on line 28 of Form 1040.
For SEPs, the deduction on line 28 is limited to the smaller of a maximum contribution amount or 25 percent of the self-employed business owner's net earnings.
The Inspector General's review pinpointed the IRS's lack of adequate controls for providing reasonable assurance SEP deductions intended for self-employed taxpayers were accurate and the amounts deducted were consistent with amounts reported on Form 5498 submitted by trustees and financial institutions.
Also reviewed was how controls over SEP deductions affected other self-employed retirement plan deductions on line 28 of Form 1040.
The Wage and Investment Division of the IRS is responsible for tax returns claiming deductions on Form 1040, line 28, for contributions to a SEP retirement plan account.
The W&I Division checks for errors or incorrect refunds when it processes individual tax returns.
In addition, the W&I Division is responsible for the Automated Underreporter (AUR) program that uses outside data to identify taxpayers who have misstated entries on previously processed tax returns.
By following up on identified inappropriate deductions, the IRS could reasonably have expected more than $14 million in revenue for 2011.
Also, with improved controls for future self employed tax return processing, the IRS could generate more than $71 million in subsequent revenue over the next five years.
The IRS replied to the Inspector General's recommendations with increased scrutiny and examinations of self-employed business owners' tax returns.
Self-employed business owners should review their 2011-2013 tax returns to make sure a Schedule C was attached to justify any Form 1040 SEP contributions.
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