Employee Plans Compliance Unit (EPCU) - Completed Projects - Project with Summary Reports – Foreign Distributions – Form 1099-R
Foreign Distributions – Form 1099-R Project Overview
The Employee Plans Compliance Unit (EPCU) Foreign Distributions – Form 1099-R project began in December 2009 and ended in August 2011. This Project was the second international project developed for the Employee Plans (EP) international compliance initiative.
Compliance contact letters were sent to over 280 U.S. citizens and resident aliens with foreign addresses (global U.S. persons) who received a distribution subject to the Internal Revenue Code section 72(t) tax, but did not report the tax on a Form 1040, U.S. Individual Income Tax Return or Form 1040NR, U.S. Nonresident Alien Income Tax Return. These individuals were asked to answer questions about themselves and to confirm they did receive an early distribution that was not reported on their income tax return. Then they were asked to become compliant – file the Form 1040 or 1040NR reporting the distribution if they had not previously filed, amend the Form 1040 or 1040NR if they had previously filed but had not reported the distribution, and pay the additional tax owed.
The Code section 72(t) tax provides that if you receive a distribution before age 59 ½ (early distribution) from an individual retirement account (IRA) or other qualified retirement plan, there is an additional tax imposed equal to 10% of the amount of the early distribution includable in your gross income. There are some exceptions to this additional tax, including death and disability, but the Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., that these individuals received reporting the distribution to the IRS did not show any exception applied.
The project goals were met, and focus points for EP were identified including recommendations to enhance compliance. Responses received showed it was difficult to get a complete picture of the characteristics of global U.S. persons in the sample because of difficulty in locating them. This difficulty was due to a combination of reasons including:
- global U.S. persons are extremely mobile, moving between an address in the U.S. and another in a foreign country during the year or for years at a time due to work, cost of living, healthcare, and family; and
- incomplete address information on Form 1099-R.
Every responding individual confirmed receipt of the early distribution. However, they also indicated there is non-compliance regarding reporting and paying the Code section 72(t) tax, due to the following reasons:
- global U.S. persons are unaware they owe tax on their worldwide income;
- they don’t understand there may be a filing requirement despite entitlement to a refund or sufficiently withheld taxes; and
- their support persons (payers, employers, tax preparers) need additional information regarding U.S. filing, withholding, and reporting requirements, including the Code section 72(t) tax.
Correction was obtained by securing delinquent and amended tax returns, as well as payment of tax. Referrals for Examination were made on a small percentage of cases where the individuals appeared noncompliant.
A large body of information is available for international TPs on www.irs.gov, and in many IRS Publications and Instructions. However, the Project documented that EP needs to continue directing greater efforts towards global U.S. persons, their employers and tax preparers.
The Project was designed to obtain information about early distributions received by global U.S. persons. This information would enable EP to have a better understanding of the international sector and help EP in assessing the need to develop further tools, guidance and enforcement efforts.
For U.S. citizens or resident aliens (U.S. persons), the rules for filing income, estate, and gift tax returns and paying estimated tax are generally the same whether an individual lives inside or outside the U.S. The worldwide income of a U.S. person is subject to U.S. income tax, regardless of where he or she resides. This means that all U.S. persons must report and pay tax on their worldwide income, even if they live abroad.
The Project goals were to:
- identify global U.S. persons who received an early distribution subject to the Code section 72(t) tax but did not report the tax;
- send compliance contact letters asking them to:
- verify information on Form(s) 1099-R,
- explain why they did not report and pay the Code section 72(t) tax, and
- become compliant.
The EPCU reviewed and analyzed the compliance check responses to determine:
- common reasons why the Code section 72(t) tax was not reported or paid; and
- if global U.S. persons have clear and accurate information regarding the Code section 72(t) tax.