4.4.14  Individual Retirement Account (IRA), Education Savings Accounts and Medical Savings Account Adjustments

Manual Transmittal

February 20, 2015

Purpose

(1) This transmits revised IRM 4.4.14, AIMS Procedures and Processing Instructions, Individual Retirement Account (IRA), Education Savings Accounts and Medical Savings Account Adjustments.

Material Changes

(1) References to outdated organizational titles have been updated throughout the IRM.

(2) IRM Section 4.4.14.1 was updated with the current title of Form 5329.

(3) IRM Section 4.4.14.2 was updated to delete references to taxes applicable to tax years 1996 and prior.

(4) IRM Section 4.4.14.3 was updated to identify form names and correct grammatical errors.

(5) IRM Section 4.4.14.4 was added for Centralized Case Processing procedures.

Effect on Other Documents

This revision supersedes the previous IRM 4.4.14, issued 11-6-2009.

Audience

Large Business and International (LB&I), Small Business/Self Employed (SB/SE), Wage and Investment (W&I), and Tax Exempt and Government Entities (TEGE) employees

Effective Date

(02-20-2015)

Beth Haverly-Raymakers

Program Manager, Operations Support
Small Business/Self-Employed

4.4.14.1  (02-20-2015)
Introduction

  1. This chapter contains procedures for Individual Retirement Arrangements (IRA), Education Savings Account and Medical Savings Account adjustments made by Examination.

  2. A Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, assessment can be made during a Form 1040, U.S. Individual Income Tax Return, audit. The assessment appears in other taxes on Form 4549, Income Tax Examination Changes, and will be identified as an IRA Tax on Form 4549. The Form 5329 includes both income tax and excise tax. The Form 5329 income tax is a Master File Tax Code (MFT) 30 assessment and the Form 5329 excise tax is an MFT 29 assessment.

    Note:

    The excise tax (MFT 29) assessment does not qualify for IRC 6404(g) suspension of interest, it only applies to the income tax or MFT 30 part of the assessment.

  3. For more information on IRAs, see IRM 21.6.5, Individual Tax Returns - Individual Retirement Arrangements (IRA), Coverdell Education Savings Accounts (ESA), Archer Medical Savings Accounts (MSA) and Health Savings Accounts (HSA).

4.4.14.2  (02-20-2015)
Form 5329

  1. Form 5329 is used by the taxpayer to report additional taxes. The table below describes the part number of Form 5329, the corresponding reference number and the type of tax (income or excise).

    Part Type Ref # Type
    I Additional Tax on Early Distributions - IRC 72(t) N/A Income
    II Additional Tax on Certain Distributions from Education Accounts - IRC 72(t) N/A Income
    III Increase or decrease tax on excess contributions reported on Form 5329, Part III, Additional Tax on Excess Contributions to Traditional IRAs - IRC 4973 160 Excise
    IV Increase or decrease tax on excess contributions reported on Form 5329, Part IV, Additional Tax on Excess Contributions to Roth IRAs - IRC 4973 236 Excise
    V Increase or decrease in tax on excess contributions reported on Form 5329, Part V, Additional Tax on Excess Contributions to Coverdell ESAs - IRC 4973 235 Excise
    VI Increase or decrease tax on excess contributions reported on Form 5329, Part VI, Additional Tax on Excess Contributions to Archer MSAs - IRC 4973 233 Excise
    VII Increase or decrease to additional 6% tax on excess contributions to HSAs. Reported on Form 5329, Part VII, Additional Tax on Excess Contributions to Health Savings Accounts (HSAs) 237 Excise
    VIII Increase or decrease in accumulations tax reported on Form 5329, Part VIII, Additional Tax on Excess Accumulation in Qualified Retirement Plans (Including IRAs) - IRC 4974 162 Excise
           
           
  2. To determine whether the taxpayer paid additional tax or filed Form 5329:

    • Secure a RTVUE to determine if the Form 1040 included an amount on line 58, Additional Tax on IRA's, other qualified retirement plans, etc. or line 59 for 2014 Form 1040. The Form 5329 schedule will also be transcribed if it was required and filed.

    • Pull up IDRS command code IMFOLI - an MFT 29 indicates that an assessment was made from Form 5329 during the specific period.

4.4.14.2.1  (02-20-2015)
Additional Tax on Early Distributions

  1. The additional tax is computed at 10% of the premature distribution. The amount will be taken into account when the total corrected income tax is determined and assessed on the MFT 30 module.

4.4.14.2.2  (02-20-2015)
Additional Tax on Certain Distributions From Education Accounts

  1. The additional tax is computed at 10% of the premature distribution. The amount will be taken into account when the total corrected income tax is determined and assessed on the MFT 30 module.

4.4.14.2.3  (02-20-2015)
Additional Tax on Excess Contributions to Certain Tax-Favored Accounts and Annuities Including IRAs

  1. IRC 4973 imposes a 6% excise tax on any "excess contribution" . See IRC 4973 for the definition of "excess contributions."

    Type Code Section
    Individual Retirement Accounts IRC 408(a)
    Roth IRAs IRC 408(a)
    Archer MSA IRC 220(d)
    Individual Retirement Annuity IRC 408(b)
    Custodial Account treated as Annuity Contract IRC 403(b)(7)
    Coverdell Educational Savings Account IRC 530
    Health Savings Account IRC 223(d)
  2. Input of IRA Reference Numbers 160 or 162 must equal the transaction code (TC) 30X tax amount that is entered in Item 12 of Form 5344, Examination Closing Record.

4.4.14.2.4  (02-20-2015)
Additional Tax on Excess Accumulation in Qualified Retirement Plans

  1. IRC 4974 imposes a 50% excise tax on excess accumulation in qualified retirement plans (including IRAs).

  2. The tax assessed on excess accumulation in qualified retirement plans is an excise tax and must be assessed on the MFT 29 module.

4.4.14.2.5  (02-20-2015)
Statute of Limitations

  1. If a consent to extend the statute of limitations is being prepared and an excise tax related to an IRA may be assessed, complete the "kind of tax" line on the consent form, by inserting "income and excise." The excise tax statute must also be extended in addition to the income tax statute if there is a possibility that an excise tax may be assessed.

    Note:

    If the income tax statute has already expired, the "kind of tax" line on the consent form should only include "excise" .

  2. The filing of Form 1040 starts the income tax statute for IRC 72(t), 10 percent additional tax on early distributions (Form 5329, Part I and Part II), but not the excise tax imposed by subtitle D. The filing of Form 5329 either attached to the Form 1040 or filed separately, starts the excise tax statute for the tax line item for which an entry has been made. The filing of Form 5329 for a specified period on which an entry has been made with respect to a tax imposed under a provision of subtitle D (including a return on which an entry has been made showing no liability for such tax for such period) shall constitute the filing of a return for all tax amounts required to be reported for the tax period.

4.4.14.2.5.1  (02-20-2015)
Substantial Omission of Items

  1. Substantial Omission of Items under IRC 6501(e)(3) may be applicable. If the tax return omits an amount of tax which exceeds 25 percent of the amount of tax reported on the return, the tax may be assessed within 6 years from the date the return is filed or due, whichever is later. In determining the amount of tax omitted on a return, do not take into account any amount of tax imposed by chapter 41, 42, 43, or 44 which is omitted from the return if the transaction giving rise to the tax is disclosed in the return, or in a statement attached to the return, in a manner adequate to inform the Secretary of the existence and nature of the item.

  2. Where the taxpayer has an expired income tax statute on Form 1040 and a return of excise tax has not been filed, there is no excise tax statute of limitations on assessment. The excise tax statute can be reflected using the "II" alpha statute code in the "month" portion of the AIMS Assessment Statute of Expiration Date (ASED) field if the requirements of IRM 25.6.3, Examination Process - Assessment Statute of Limitations Controls, are met. See IRM 25.6.23, Exhibit 25.6.23-3, Instructions for Updating the Statute on AIMS, which pertain to ASED alpha code "II." See IRM 25.6.1.9.4.3, Statute of Limitations, Processes and Procedures, Forms Reporting More Than One Item of Tax, where the statute of limitations and ramifications of separate and distinct types of taxes are discussed.

4.4.14.2.6  (02-20-2015)
Penalties

  1. Delinquency, negligence, or fraud penalties may be applicable to the excise tax. The portion of the penalties applicable to the income and IRA excise tax should be separately stated in the "other information" section of Form 4549.

  2. If Form 5329 has not been filed, the delinquency penalty under both IRC 6651(a)(1) failure to file and IRC 6651(a)(2) failure to pay must be considered. If the delinquency penalty does apply, and the Form 1040 was timely filed, it must be manually computed in RGS. If the delinquency penalty applies, then the accuracy related penalties should not be assessed against the excise tax.

4.4.14.3  (02-20-2015)
Procedures for the Examining Officer

  1. Examinations of Form 1040 may result in a no change or adjustment to a Form 5329.

  2. AIMS controls must be established for the individual taxpayer's MFT 30 account.

    Note:

    If the normal individual income tax statute is expired but you have an excise tax statute due to failure to file Form 5329, the individual MFT 30 should be controlled with " II" alpha statute code.

  3. If the outcome of the audit is a no change, do not process the no change to the IRA account.

  4. If the outcome of the audit is a change, follow the procedures below.

    Note:

    RGS will reflect all IRA adjustments in "other taxes" and not distinguish on the Form 4549 between the income tax and excise tax.

4.4.14.3.1  (02-20-2015)
Adjustment to Part I or II of Form 5329

  1. If the adjustment is to part I or II of Form 5329, the adjustment is included in the TC300 amount on Form 5344. The "other information" section of Form 4549 should indicate the IRA taxes are all income taxes. If the adjustment is a change, the assessment is included in "other taxes" on Form 4549.

    Note:

    The Form 5329 income tax assessment will be an MFT 30 assessment. Therefore, if an adjustment is being made solely to Part I and/or Part II, no special processing is necessary.

4.4.14.3.2  (02-20-2015)
Adjustment to Parts III through VIII of Form 5329

  1. If any or all of the adjustment is to Parts III through VIII of Form 5329, the Form 4549 will include the excise tax adjustment as part of other taxes. In addition, the "other information" section of Form 4549 should explain the type of "other taxes."

  2. The explanation of "other taxes" will be included as part of the individual report if other issues on Form 1040 are under audit. Form 886-A, Explanation of Items, attached to Form 4549 should identify the adjustment and applicable Internal Revenue Code sections. In joint returns, the spouse(s) to whom the excise tax is applicable should be specified. The adjustment must be made on the MFT 29 module therefore you must research to see if an MFT 29 module exists.

4.4.14.3.2.1  (02-20-2015)
Research MFT 29 Module

  1. Research IDRS to determine if there is an MFT 29 account on Master File.

4.4.14.3.2.1.1  (02-20-2015)
MFT 29 Account Exists

  1. Review the entity information for MFT 30 and MFT 29. If the entity is not correct, prepare Form 2363, Master File Entity Change. Extreme care must be taken to ensure that the Form 2363 is input to the correct MFT account. If the change is only for the MFT 29 account, include "MFT 29 - IRA" in bold letters, on the top portion of the form.

  2. Normally Form 2363 input to the MFT 30, Individual Master File (IMF) module will cause automatic updating of the MFT 29, IRA account if the IMF filer(s) is also an IRA filer(s). It will not be necessary to prepare Form 2363 for input to the IRA module unless the information to be updated on the IRA account is different than what is being input to the MFT 30 module.

  3. If Form 2363 is to be prepared, input the form one cycle prior to the input of the adjustment document (i.e., Form 5344) . An exception to this is if name change or address change was previously input directly to the MFT 29 account. When this situation exists, an address or name change input to the MFT 30 account will not automatically change the IRA address or name. Only another Form 2363 input to the MFT 29, IRA account or subsequent IRA return posting will change the IRA address or name.

  4. Form 2363 entries include:

    1. Transactions Codes applicable to the IRA file are: TC 011, 012, 013, 014, 015, 016, 020, 030, and 041.

    2. IRA First Name Line—Must be the name of an individual, joint names are not allowed.

    3. Address Data—Address data must be perfected and input in total. Major city coding cannot be used. State abbreviations must be used, ZIP code and location codes must be input. There will be no computer generation of these codes.

    4. Miscellaneous Data—such as, Fiscal Month Ending (calendar year filer enter 12, if fiscal year filer enter the fiscal month ending) . POA codes for IRA accounts will be input to the CAF by the Campus POA UNIT. Valid POA documents should be forwarded to the Campus.

    5. Change in IRA indicator. The indicator must be input with TC 016 and accompanied by the tax year digits. Inputs must be Codes 1, 2, 3, or 4 and will have the following meaning and action on the Master File.

      Code Definition
      0 Indicates that no IRA return was filed or that the taxpayer is not considered an IRA filer.
      1 IRA filer is the primary taxpayer.
      2 IRA filer is the secondary taxpayer.
      3 Indicates both taxpayers are IRA filers.
      4 Input of Code 4 will set the IRA indicator to zero on the Master File.
    6. Other data elements, editing and transactions will follow the same rules as apply to the MFT 30 module.

4.4.14.3.2.1.2  (02-20-2015)
MFT 29 Account Does Not Exist

  1. If no MFT 29 exists, an MFT 29 account must be established.

    1. A Form 3177, Notice of Action for Entry on Master File, must be prepared and faxed to Centralized Case Processing (CCP) requesting the input of a TC 971 AC 144. The TC 971 AC 144 causes the generation of an IRAF MFT 29 account. The MFT 29 account must be processed for each year that an assessment is needed. The TC 971 AC 144 also generates an IRA code of 1 on the MFT 29 module. If this code is not correct, request a correction to the code using procedures found in IRM 4.4.14.3.2.1.1.

      Note:

      If multiple tax periods are included on one Form 3177, it should be for the same SSN. Each tax period on the Form 3177 must contain specific actions to be taken.

4.4.14.3.3  (02-20-2015)
Credits/Payments

  1. If advance payments have been made, a separate Form 3244-A, Payment Posting Voucher-Examination, must be prepared for income tax or IRA excise tax. Annotate "IRA MFT 29" in the remarks section of Form 3244-A.

  2. Research IDRS to determine if a payment has been made for the MFT 29 module but has been applied to the MFT 30 module. Use Form 2424, Account Adjustment Voucher, to transfer any available credit from the MFT 30 module to pay a liability on the MFT 29 module, or vice versa.

4.4.14.3.4  (02-20-2015)
Closing IRA Adjustments from the Group

  1. Case files containing IRA adjustments will be identified on Form 3198, Special Handling Notice for Examination Case Processing, by checking the box in the "Special Features" section titled "Individual Retirement Account (IRA) Adjustments" .

  2. In lieu of a separate Form 5344, for the MFT 30 adjustment and the MFT 29 adjustment, an attachment to Form 5344 - IRAF Adjustments document was developed to assist in the closing of IRA cases. The document can be found at: Form 5344-IRAF Adjustments. Attach a copy of the completed document to the Form 5344.

4.4.14.4  (02-20-2015)
CCP Processing of Form 5344 for the Excise Tax (MFT 29) Adjustments

  1. The following procedures apply only when an IRA account indicator is present and the adjustment is being processed with Command Code AMCLSI. Complete Form 5344 from the information completed by the group on the "attachment to Form 5344 - IRAF Adjustments" document for processing of the MFT 29 adjustment(s).

  2. Valid entries on Form 5344 to process the MFT 29 adjustment using CC AMCLSI are as follows:

4.4.14.4.1  (02-20-2015)
Form 5344 Entries

  1. 1–6, CC AMCLS definer. Enter an "I."

  2. P7–18, Social Security Number. This is always the SSN applicable to the Form 1040. However, if the adjustment is to the spouse’s account (secondary SSN on the Form 1040), line through this item before forwarding the closing document for processing.

  3. P20–21, MFT. The MFT is always 30. After completion of CC AMCLSI, the MFT 29 module will be generated within the system to build the record for transfer to Master File. MFT 29 will never actually display on the terminal screen.

  4. P38-40, Block Number. The following block numbers are valid for CC AMCLSI: 0NN, 1NN, 78N, 00X, 08X, 10X, 18X, or 78X

  5. B–, Name. Name and name control are the same as the MFT 30 module, except in the case of a joint return. The name of the IRA account will be that shown on Form 5329 filed with the Form 1040. Line through the first name of the taxpayer not applicable. The IRA account could be for either spouse, or one for each spouse, but never a joint account for both spouses.

  6. Item 01, Individual Retirement Account – IRA. If the IRA adjustment is to the spouse’s account (secondary SSN on the Form 1040), enter the secondary SSN. Do not make an entry in Item 01 if the IRA account being adjusted is that of the primary taxpayer.

  7. Item 12, Tax, Penalty and Interest Adjustment. Enter the transaction code in the "code" column and amount of tax adjustment increase or decrease as appropriate. Valid Transaction Codes are 300, 301, 340, 341, 342, 770, 772, 16X and 27X.

  8. Item 13, Disposal Code. Enter the applicable disposal code.

  9. Item 15, Credit and Tax Computation Adjustments. Reference numbers and amounts entered here serve to identify the type and amount of tax adjustment reflected in the TC 30X entry in item 12, also to correct specified non-tax data on the MFT 29 module. Item reference numbers must be used with any tax adjustment.

    1. Enter the reference number in the "REF" column, and the corresponding amount of increase or decrease as appropriate.

    2. The amount entered for reference number(s) 160, 162, 233, 235, 236 or 237 must be the same as the TC 30X amount in item 12.

    Note:

    The 10% premature distributions tax requires no special handling by tax examiners. Premature distributions tax, although reported on Form 5329 is an income tax which is assessed on the MFT 30 account and taken into consideration when the total corrected income tax is determined by the examiner

    .

  10. Item 36, Hash Total. This item will be the last entry

4.4.14.4.2  (02-20-2015)
CCP Processing After Terminal Input

  1. After the MFT 29 adjustment is input to the terminal with IDRS Command Code AMCLSI, make an AMDIS print to accompany the MF 30 case file. The final closing of the MFT 30 module can now be input using IDRS Command Code AMCLSE.


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