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

4.4.14.1  (11-06-2009)
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 assessment can be made during a Form 1040 audit. The assessment appears in other taxes on Form 4549, Income Tax Examination Changes and will show up as IRA Tax on Form 4549. The Form 5329 includes both income tax and excise tax. The Form 5329 income tax is an MFT 30 assessment and the Form 5329 excise tax is an MFT 29 assessment.

    Note:

    The excise tax or 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 IRA's, 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  (11-06-2009)
Form 5329, Additional Taxes Attributable to Qualified Retirement Plans (Including IRAs), Annuities, and Modified Endowment Contracts

  1. Form 5329 is used by the taxpayer to report additional taxes.

    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
    N/A Increase or decrease in tax on excess regular distributions. (For tax year 1996 and prior only.) 194 Excise
    N/A Increase or decrease in tax on excess lump sum distributions. (For tax year 1996 and prior only.) 195 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 60, Additional Tax on IRA's, other qualified retirement plans, etc. The Form 5329 schedule will also be transcribed if it was required and filed.

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

4.4.14.2.1  (11-06-2009)
Additional Tax on Early Distributions

  1. This 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  (11-06-2009)
Additional Tax on Certain Distributions From Education Accounts

  1. This 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  (11-06-2009)
Additional Tax on Excess Contributions to Certain Tax-Favored Accounts and Annuities Including IRAs

  1. Code Section 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. Tax is imposed in the case of IRC 4973(a)

  3. Input of IRA Reference Numbers 194, 195, 160 or 162 must equal the TC30X tax amount that is entered in Item 12 of Form 5344.

4.4.14.2.4  (11-06-2009)
Additional Tax on Excess Accumulation in Qualified Retirement Plans

  1. Code Section 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  (11-06-2009)
Excess Regular Distributions From a Qualified Retirement Fund

  1. The tax assessed on Excess Regular Distributions from a Qualified Retirement Fund is an excise tax and must be assessed on the MFT 29 module.

4.4.14.2.6  (11-06-2009)
Excess Lump-Sum Distributions from a Qualified Retirement Fund

  1. The tax assessed on Excess Lump-Sum Distributions from a Qualified Retirement Fund is an excise tax and must be assessed on the MFT 29 module.

4.4.14.2.7  (11-06-2009)
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, for Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts (Parts III and IV) starts the excise tax statute for the tax line item for which an entry has been made. The filing of a return 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 of all amounts of such tax which would be required to be reported on such return for such period.

4.4.14.2.7.1  (11-06-2009)
Substantial Omission of Items

  1. Substantial Omission of Items under IRC 6501(e)(3) may be applicable. In the case of a return of a tax imposed under a provision of subtitle D, if the return omits an amount of such tax properly includible thereon which exceeds 25 percent of the amount of such tax reported thereon 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, there shall not be taken 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 such tax is disclosed in the return, or in a statement attached to the return, in a manner adequate to apprise the Secretary of the existence and nature of such item.

  2. Where the taxpayer has an expired income tax statute on the 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 ASED field if the requirements of IRM 25.6.23, 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, Forms Reporting More Than One Item of Tax, where the statute of limitations and ramifications of separate and distinct types of taxes are discussed.

4.4.14.2.8  (11-06-2009)
Penalties

  1. Delinquency, negligence, or fraud 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 the report.

  2. If the Form 5329 has not been filed, 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  (11-06-2009)
Procedures for the Examining Officer

  1. Examination of Forms 1040 for 1975 and subsequent tax periods 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 is a no change, do not process the no change to the IRA account.

  4. If the outcome is a change, follow 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  (11-06-2009)
Adjustment to Part 1 or 11 of the Form 5329

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

    Note:

    The Form 5329 income tax assessment will still be a MFT 30 assessment. Therefore, if an adjustment is being made solely to Part 1 and/or Part II, no special processing is necessary.

4.4.14.3.2  (11-06-2009)
Adjustment to Parts III through VIII of the Form 5329

  1. If any or all of the adjustment is to Parts III through VIII of the Form 5329, the Form 4549 will include the excise tax adjustment as part of other taxes. In addition, the "other information " section of the RAR should explain the type of "other taxes." (This will be included as part of the individual report if other issues on the Form 1040 are under audit. Forms 886-A attached to the RAR should identify the adjustment and applicable 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  (11-06-2009)
Research MFT 29 Module

  1. Analyze current research data to determine if there is an MFT 29.

4.4.14.3.2.1.1  (11-06-2009)
MFT 29 Account Exists

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

  2. Normally Forms 2363 input to the MFT 30, IMF module will cause automatic updating of the MFT 29, IRA module if the IMF filer(s) is also an IRA filer(s) . It will not be necessary to prepare an input to the IRA file unless the information to be updated on the IRA account is different than what is being input to the IMF. If one is to be prepared, input Form 2363 one cycle prior to the input of the adjustment document. 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 change input to the IMF will not automatically change the IRA address. Only another Form 2363 input to the MFT 29, IRA account or subsequent IRA return posting will change the IRA address.

  3. 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 service center POA UNIT. Valid POA documents should be forwarded to the service center.

    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 IMF.

      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 IMF.

    6. Other data elements, editing and transactions will follow the same rules as apply to the IMF.

4.4.14.3.2.1.2  (11-06-2009)
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 module. The MFT 29 account must be processed for each year that an assessment is needed. CCP has requested that if multiple tax years are included on one Form 3177 it should be for the same SSN and that the form be very specific as to what actions should be taken for each tax year. 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.

4.4.14.3.3  (11-06-2009)
Credits/Payments

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

  2. Analyze current research data to determine if a payment has been made for the IRA account but has been applied to the IMF account. Use Form 2424 to transfer any available credit from the MFT 30 account to pay a liability on the MFT 29 account, or vice versa.

4.4.14.3.4  (11-06-2009)
Closing IRA Adjustments from the Group

  1. Case files containing IRA adjustments will be identified by Form 3198 with the block "other" checked, followed by "IRA adjustment" , and identifying TIN of the account to be adjusted and the type and amount of penalty.

  2. In lieu of separate Forms 5344, an attachment to Form 5344 - IRAF Adjustments document was developed to assist in the closing of IRA cases. The document can be found at: http://mysbse.web.irs.gov/exam/tip/default.aspx Attach a copy of the completed document to the Form 5344.

4.4.14.3.5  (11-06-2009)
Closing from CCP

  1. The following procedures apply only when an IRA account indicator is present on the Tax Module Section of the TIF and the IRA adjustment is being processed with Command Code AMCLSI. Complete the Form 5344 for processing of the IRA adjustment(s).

  2. Valid entries on Form 5344 to process the IRA adjustment using CC AMCLSI are as follows. Item numbers referred to below are for Form 5344.

4.4.14.3.6  (11-06-2009)
Form 5344 Entries

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

  2. P7–18, Social Security Number. For terminal input, this is always the SSN applicable to the Form 1040. However, if the IRA 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. For terminal input, the MFT is always 30. After completion of CC AMCLSI, MFT Code 29 will be generated within the system to build the IRA 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 IMF account, except in the case of a joint IMF return. The name of the IRA account will be that shown on Form 5329, Return for Individual Retirement Savings Arrangement, filed with the Form 1040. Line through the first name of 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

  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 IRAF. Item reference numbers must be used with any tax adjustment. See IRM 4.4.14.2.for a list of valid reference numbers.

    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, 194, 195, 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 Individual Master File and taken into account when the total corrected income tax is determined by the auditor or agent.

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

4.4.14.3.7  (02-08-1999)
Processing After Terminal Input

  1. After the IRA Adjustment is input to the terminal (with Command Code AMCLSI) make an AMDIS print to accompany the MFT 30, IMF case file. The final closing can now be input using CC AMCLSE.


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