Today, Congressman Steve Israel (D-Huntington) called on the Internal Revenue Service (IRS), as they increase their enforcement of Individual Retirement Account (IRA) contribution or withdrawal errors, to reassess the steep penalties that taxpayers face for innocent mistakes. Because of the IRS' new crackdown policy, many seniors, who are unaware of errors they are committing when it comes to managing their IRA, could face steep financial penalties that they can't afford. Rep. Israel emphasized the need for common-sense changes to these IRS policies and an increased public education effort for seniors.
Rep. Israel said, "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. 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."
Seymour Goldberg, a Certified Public Accountant and Attorney joined the Congressman. He said, "I've worked extensively with seniors and their families who are subject to significant penalties from the IRS for mistakes they were unknowingly committing when it comes to IRA withdrawals. It's imperative that the IRS reassess these penalties and also educate seniors on the issue. I thank Congressman Israel for bringing attention to this important issue to protect our seniors."
Ron Fatoullah, an elder law attorney, echoed these sentiments. He said, "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."
Henry Montag also joined the Congressman and said, "As a certified financial planner (CFP), I work with my clients to make sure they are following all the rules when it comes to IRA withdrawals. However, many seniors do not work with CFPs and are unaware that these rules even exist. For this innocent mistake, they can be severely penalized, costing them money they cannot afford to lose. I applaud Rep. Israel's work to make sure the IRS is not unreasonably penalizing these seniors and instead properly educates the public on this 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.
Rep. Israel sent a letter to the IRS in January calling on them to better educate the public on the rules pertaining to IRAs, to release to the public how it plans to go about stepping up their enforcement, and to reassess penalties that those unknowingly committing these errors are subject to. No response has been received.