21.6.5 Individual Retirement Arrangements (IRA), Coverdell Education Savings Accounts (ESA), Archer Medical Savings Accounts (MSA) and Health Savings Accounts (HSA)

Manual Transmittal

September 12, 2017

Purpose

(1) This transmits revised 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).

Material Changes

(1) Various editorial changes made throughout.

(2) IRM 21.6.5.1 Added new information concerning internal controls.

(3) IRM 21.6.5.2(2) Added Roth IRA’s are not taxable.

(4) IPU 16U1706 issued 11-29-2016 IRM 21.6.5.2(3) Added 2017 information in the table.

(5) IRM 21.6.5.2(3) Deleted 2013 information from the table.

(6) IRM 21.6.5.3(2) Added the TAS information into this section.

(7) IPU 16U1706 issued 11-29-2016 IRM 21.6.5.3.1(2) Added 2017 information in the table.

(8) IRM 21.6.5.3.1(2) Deleted 2013 information from the table.

(9) IPU 16U1706 issued 11-29-2016 IRM 21.6.5.3.2(3) Added 2017 information in the table.

(10) IRM 21.6.5.3.2(3) Deleted 2013 information from the table.

(11) IPU 16U1706 issued 11-29-2016 IRM 21.6.5.3.4(1) Deleted 2012 and added 2017 information for SEP.

(12) IRM 21.6.5.3.4(1) Deleted (a) 2013 information and (4) added Pub 560 as a reference.

(13) IPU 16U1706 issued 11-29-2016 IRM 21.6.5.3.5(7) Added 2017 information in the table.

(14) IRM 21.6.5.3.5(7) Deleted 2013 information from the table.

(15) IPU 17U0105 issued 01-13-2017 IRM 21.6.5.3.6(8) Updated the IDRS number in the first bullet where to send the airline cases.

(16) IRM 21.6.5.3.6(8) Deleted information in (8) all other paragraphs will move up.

(17) IRM 21.6.5.4.1(7) Added to the 4th THEN box procedures to enter the push code and 6th THEN box updated information in returning the Form 8606.

(18) IRM 21.6.5.4.1.(9) Deleted manual refund procedures.

(19) IPU 16U1706 issued 11-29-2016 IRM 21.6.5.4.3 Added a new (4) and (5) for waiving the 6 percent excess contribution tax.

(20) IRM 21.6.5.4.3(4) and (5) Deleted the two paragraphs added in November - Per Counsel cannot waive 6% tax.

(21) IRM 21.6.5.4.4(4)(g) Deleted second note and deleted (5), all paragraphs are moved up by one.

(22) IPU 16U1706 issued 11-29-2016 IRM 21.6.5.4.6.1(1) Added 2017 information in the table.

(23) IRM 21.6.5.4.6.1(1) Deleted 2013 information from the table.

(24) IPU 16U1706 issued 11-29-2016 IRM 21.6.5.4.6.3(1) Added 2017 information to the table.

(25) IRM 21.6.5.4.6.3(1) Deleted 2013 information from the table.

(26) IPU 16U1706 issued 11-29-2016 IRM 21.6.5.4.8(5) and (13) Added 2017 information.

(27) IRM 21.6.5.4.8(5) and (13) Deleted 2013 information from the table.

(28) IPU 16U1706 issued 11-29-2016 IRM 21.6.5.4.8.4(3) Added 2017 information in the table.

(29) IRM 21.6.5.4.8.4(3) Deleted 2013 information from the table.

(30) IRM 21.6.5.4.9.1(3) Deleted 2013 information from the table.

(31) IRM 21.6.5.4.9.2(4) Deleted 2013 information from the table.

(32) IRM 21.6.5.4.9.2.2(3) Added information on rollovers are subjected to annual contributions limits.

(33) IRM 21.6.5.4.9.3(4) Added information to the 4th bullet and )5) deleted 2013 information from the table.

(34) IPU 16U1706 issued 11-29-2016 IRM 21.6.5.4.9.3(5) Added 2017 information in the table.

(35) IPU 17U0858 issued 05-16-2017 IRM 21.6.5.4.10.3 Added new information for the Form 1099-QA and the Form 5498-QA.

(36) IPU 17U0864 issued 05-18-2017 IRM 21.6.5.4.10.3(2) Added "if applicable" behind CIS in the second bullet.

(37) IPU 17U1108 issued 07-07-2017 IRM 21.6.5.4.10.3(2) and (3) Revised the procedures, eliminated the mailbox and the forwarding of the Form 4442.

(38) IRM 21.6.5.4.10.3(2) Added information concerning the Form 1099-QA and Form 5498-QA are only available as paper.

(39) IPU 17U0858 issued 05-16-2017 IRM 21.6.5.4.11.7(5) Added new (5) on additional information concerning correspondence date.

(40) IPU 17U0858 issued 05-16-2017 IRM 21.6.5.4.11.8(2) Added the spousal indicator of "0" , for non-joint taxpayers.

(41) IRM 21.6.5.4.11.8(2) Correct the indicators in the 1st THEN box.

(42) IPU 17U0858 issued 05-16-2017 IRM 21.6.5.4.11.9.2 Removed this section, CP 29 is no longer a valid transcript.

Effect on Other Documents

IRM 21.6.5, Individual Retirement Arrangements (IRA), Coverdell Education Savings Accounts (ESA), Archer Medical Savings Accounts (MSA) and Health Savings Accounts (HSA), dated 09-19-2016, (effective 10-01-2016) is superseded. Incorporated into this IRM are the following IRM procedural updates (IPUs): IPU 16U1706 (issued 11-29-2016), IPU 17U0105 (issued 01-13-2017), IPU 17U0858 (issued 05-16-2017), IPU 17U0864 (issued on 05-18-2017), and IPU 17U1108 (issued 07-07-2017).

Audience

All employees performing account/tax law work.

Effective Date

(10-01-2017)

Kevin M. Morehead
Director, Accounts Management
Wage and Investment Division

Program Scope and Objectives

  1. Purpose: This IRM covers various Individual Retirement Arrangements, Education Savings Accounts, Medical Savings Accounts and Health Savings Accounts.

  2. Audience: The primary users of the IRM are all IRS employees in Business Operating Divisions (BODs) who are in contact with taxpayers by telephone, correspondence, or in person.

  3. Policy Owner: The Director of Accounts Management is the policy owner of this IRM.

  4. Program Owner: Accounts Management, Self-Employed/Small Business Division (SB/SE) and Wage and Investment (WI) are the programmer owners of this IRM.

  5. Primary Stakeholders: The primary stakeholders are organizations with whom Accounts Management collaborates (e.g., Return Integrity and Compliance Services (RICS) and Submission Processing).

  6. Program Goals: Program goals for this type of work are included in the Accounts Management Program Letter as well as IRM 1.4.16, Accounts Management Guide for Managers.

Background

  1. Employees in the Accounts Management (AM) organization respond to taxpayer inquiries and phone calls as well as process claims and other internal adjustment requests.

Authority

  1. Refer to IRM 1.2.21, Policy Statements for Customer Account Services Activities, for information.

  2. Additional sources for this IRM authority include:

    • IRC 72

    • IRC 213

    • IRC 4973

Responsibilities

  1. The Wage and Investment Commissioner has overall responsibility for the policy related to this IRM, which is published on an annual basis.

  2. Additional information is found in IRM 1.1.13.9.4, Accounts Management and IRM 21.1.1, Accounts Management and Compliance Services Overview.

Program Management and Review

  1. Program Reports: The program reports provided in this IRM are for identification purposes for the Accounts Management Customer Service Representatives (CSRs) and Tax Examiners. For reports concerning quality, inventory, and aged listings, please refer to IRM 1.4.16, Accounts Management Guide for Managers. Aged listings can also be viewed by accessing Control Data Analysis, Project PCD, on the Control-D/Web Access server, which has a login program control.

  2. Program Effectiveness: Program Effectiveness is determined by Accounts Management’s employees successfully using IRM guidance to perform necessary account actions and duties.

Acronyms

  1. For a comprehensive listing of any IRS acronyms, please refer to the Acronym Database.

Related Resources

  1. Refer to IRM 1.4.2.15, Related Resources, for information on related resources that impact internal controls.

  2. Additional related resources for this IRM include (list is not all inclusive):

    • Pub 560, Retirement Plans for Small Business

    • Pub 575, Pension and Annuity Income

    • Pub 590-A, Contributions to Individual Retirement Arrangements (IRAs)

    • Pub 590-B, Distributions from Individual Retirement Arrangements (IRAs)

    • Pub 907, Tax Highlights for Persons With Disabilities

    • Pub 969, Health Savings Accounts and Other Tax-Favored Health Plans

What Is an Individual Retirement Arrangement (IRA)?

  1. An Individual Retirement Arrangement (IRA) is a personal savings plan that gives tax advantages for setting aside money for retirement.

    1. Contributions to the plan may be fully or partially deductible depending on the type of IRA. Contributions to Roth IRAs are not deductible. For Additional information on Roth IRAs refer to IRM 21.6.5.4.6, Roth Individual Retirement Arrangement (IRA).

    2. The allowable IRA deduction may be less than the contributions if the taxpayer or spouse is covered by an employer retirement plan any time during the year.

  2. Amounts held in an IRA (including earnings) are generally not taxed until distributed. However, qualified distributions from Roth IRAs are not taxed.

  3. If covered by a retirement plan at work, the taxpayers deduction for contributions to a traditional IRA is reduced (phased out) if the modified adjusted gross income (MAGI) is:

    Year Married Filing Joint or Qualifying Widow(er) Single or Head of Household Married Individual Filing A Separate return
    2017 More than $99,000 but less than $119,000 More than $62,000 but less than $72,000 Less than $10,000
    2016 More than $98,000 but less than $118,000 More than $61,000 but less than $71,000 Less than $10,000
    2015 More than $98,000 but less than $118,000 More than $61,000 but less than $71,000 Less than $10,000
    2014 More than $96,000 but less than $116,000 More than $60,000 but less than $70,000 Less than $10,000

    Note:

    Once the maximum phase out amounts shown in the table above are reached, there is no deduction available as the deduction would be completely phased out.

  4. For more information on deductible amounts, refer to Pub 590-A, Contributions to Individual Retirement Arrangements (IRAs) and Pub 590-B, Distributions from Individual Retirement Arrangements (IRAs).

Individual Retirement Arrangement (IRA) Research

  1. Individual Retirement Arrangement (IRA) information is found on the Individual Retirement Account File (IRAF), Master File Tax Code (MFT) 29. Refer to IRM 21.6.5.4.11, Individual Retirement Account File (IRAF) Overview, for researching IRAF accounts on MFT 29.

  2. Follow procedures in IRM 13.1.7.2, TAS Case Criteria, to determine if taxpayers or cases should be referred to the Taxpayer Advocate Service (TAS), when you cannot resolve the taxpayers issue the same day. The definition of "same day" is within 24 hours. "Same day" cases include cases you can completely resolve in 24 hours as well as cases in which you have taken steps within 24 hours to begin resolving the taxpayers issue. Refer to IRM 13.1.7.4, Same Day Resolution by Operations. Do not refer these cases to TAS unless they meet TAS criteria or the taxpayer asks to be transferred to TAS. When referring cases to TAS, use Form 911/Form e-911, Request for Taxpayer Advocate Service Assistance (And Application for Taxpayer Assistance Order), and forward to TAS in accordance with your local procedures.

    Note:

    The Taxpayer Bill of Rights adopted by IRS in June 2014 provides that taxpayers have the right to receive prompt, courteous, and professional assistance in their dealings with the IRS. They are to be spoken to in a way that is easily understood and any correspondence from the IRS must be clear and understandable. They have the right to speak to a supervisor whenever quality service is not received. For additional information refer to the Taxpayer Bill of Rights and Publication 1, Your Rights as a Taxpayer.

  3. Additional information is available in:

    • Pub 590-A, Contributions to Individual Retirement Arrangements (IRAs) and Pub 590-B, Distributions from Individual Retirement Arrangements (IRAs). Refer to these publications for a detailed explanation of IRAs.

    • Pub 575, Pension and Annuity Income. Refer to this publication for more information about rollovers.

    • Pub 560, Retirement Plans for Small Business. Refer to this publication for more information about Simplified Employee Pensions (SEP), SIMPLE IRA plans and Qualified Plans.

    • Pub 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad. Refer to this publication for special rules in determining contribution limitations when U.S. citizens/residents working and living abroad claim the foreign earned income exclusion and/or foreign housing deduction.

Traditional Individual Retirement Arrangement (IRA)

  1. An individual establishes a traditional Individual Retirement Arrangement (IRA). The maximum deductible amount is limited to the least of the following:

    • The amount of compensation for the tax year, or

    • The amount of the actual IRA contribution (up to the maximum deductible contribution limit).

  2. The maximum deductible contribution limits are shown below.

    Year Regular Additional if age 50 or over
    2014 - 2017 $5,500 $1,000

    For more information, refer to Pub 590-A, Contributions to Individual Retirement Arrangements (IRAs).

Spousal Individual Retirement Arrangement (IRA)

  1. For taxpayers filing a joint return, an IRA may be established in a spouse's name based on the compensation of the higher-earning spouse.

  2. There is no provision for a joint IRA.

  3. Spousal contributions in the case of a married taxpayer filing a joint return are shown below:

    Year Regular Spouse Additional if spouse is age 50 or over
    2014 - 2017 $5,500 $1,000

    For more information, refer to Spousal IRA Limits in Pub 590-A, Contributions to Individual Retirement Arrangements (IRAs).

  4. The spousal IRA contribution limit is the smaller of two amounts,

    • the contribution limit above or

    • total compensation includible in the gross income of both spouses for the year,

    reduced by the following two amounts:

    1. the higher-earning spouse’s traditional IRA contributions, and

    2. the higher-earning spouse’s Roth IRA contributions.

Accounts or Annuities Deemed IRAs

  1. If a qualified employer plan allows employees to make voluntary employee contributions to a separate account or annuity established under the plan, and under the terms of the qualified employer plan, the account or annuity meets the applicable requirements, then the separate account or annuity will be treated as an IRA.

  2. This applies to plan years beginning after December 31, 2002.

  3. Refer to Pub 590-A, Contributions to Individual Retirement Arrangements (IRAs), and Pub 590-B, Distributions from Individual Retirement Arrangements (IRAs), for additional information on Deemed IRAs.

Simplified Employee Pension (SEP)

  1. A Simplified Employee Pension (SEP-IRA) is a traditional IRA used to hold contributions made under a SEP plan.

    Note:

    Contributions must be made for each eligible employee in a SEP, even if over age 701/1; however, such an employee must take minimum distributions.

    1. For tax year 2014 the annual limit on the amount of employer contributions to a SEP is smaller of $52,000 or 25 percent of the employee’s compensation.

    2. For tax years 2015 and 2016 the annual limit on the amount of employer contributions to a SEP is smaller of $53,000 or 25 percent of the employee’s compensation.

    3. For tax year 2017 the annual limit on the amount of employer contribution to a SEP is smaller of $54,000 or 25 percent of the employee’s compensation.

    4. Contributions are generally tax deductible by the contributor and tax deferred (including earnings) for the plan participant until withdrawn.

    5. Special rules apply when computing the maximum deduction for a self-employed person.

    6. There are special rules for participation, discrimination, distributions, and contributions for SEP-IRAs.

  2. Taxpayers may make traditional IRA contributions to a SEP-IRA up to the established maximum for traditional IRAs.

  3. A SEP-IRA may not be designated as a Roth IRA.

  4. For additional information on all the above, refer to Pub 560, Retirement Plans for Small Business.

Savings Incentive Match Plan for Employees (SIMPLE)

  1. A Savings Incentive Match Plan for Employees (SIMPLE) IRA Plan is a simplified retirement plan for small businesses. Generally, employers must have 100 or fewer employees to maintain a SIMPLE IRA Plan. Refer to information in Pub 560, Retirement Plans for Small Business, on the requirements employers must satisfy to set up a SIMPLE plan.

  2. The employer must make matching contributions or nonelective contributions to each eligible employee’s SIMPLE IRA.

  3. Special rules apply to SIMPLE IRAs. Refer to Pub 560, Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans), for additional information.

  4. Taxpayers may not make traditional IRA contributions to SIMPLE IRAs.

  5. A SIMPLE IRA cannot be designated as a Roth IRA.

  6. Contributions to a SIMPLE IRA are not included in the traditional IRA contribution limit.

  7. Under a SIMPLE IRA Plan, an eligible employee may elect to have his/her employer make limited annual salary reduction contributions to his/her SIMPLE IRA. Refer to the table below for annual limits on contribution amounts.

    Year Salary Deferral Limit Additional if age 50 or over
    2015 - 2017 $12,500 $3,000
    2014 $12,000 $2,500

Individual Retirement Arrangement (IRA) Rollover

  1. A rollover is a tax-free distribution of cash or other assets from one retirement plan that is contributed (rolled over) within 60 days to another retirement plan (see discussion of Roth IRAs later).

    Note:

    The IRS may waive the 60 day requirement where the failure to do so would be against equity or good conscience, such as in the event of casualty, disaster, or other event beyond the taxpayer’s reasonable control. For more information refer to "Time Limit for Making a Rollover Contribution" in Pub 590-A, Contributions to Individual Retirement Arrangements (IRAs).

  2. A rollover cannot be deducted on the tax return, but the distribution must be reported (even if it is not includible in gross income).

  3. Required minimum distributions and distributions from inherited IRAs (from someone other than taxpayer’s spouse) may not be rolled over.

    Note:

    For additional information on inherited IRAs refer to Pub 590-A, Contributions to Individual Retirement Arrangements (IRAs), and Pub 590-B, Distributions from Individual Retirement Arrangements (IRAs).

    Note:

    The Pension Protection Act of 2006, enacted on August 17, 2006, (Pub L No. 109-280), provides that, beginning January 1, 2007, non-spouses may directly transfer amounts inherited from a qualified employer-sponsored retirement plan into an individual IRA account. The account must be set up as an inherited retirement account.

  4. A taxpayer may roll over the taxable part of any eligible rollover distribution from a qualified employer retirement plan.

  5. Beginning in 2002, after-tax contributions may be rolled into an IRA. Refer to Pub 590-A, Contributions to Individual Retirement Arrangements (IRAs), for information on when after-tax contributions may be rolled over to a qualified employer plan.

  6. Beginning with TY 2002, the 60 day period for IRA rollovers can be waived in certain situations such as casualty, disaster, or other events beyond the individual’s reasonable control.

  7. Refer to Pub 590-A, Contributions to Individual Retirement Arrangements (IRAs), for additional information on eligible rollover distributions.

  8. On December 18, 2014, Public Law 113-243 amended Section 1106(a)(3) of the FAA Modernization and Reform Act of 2012, by extending the date a qualified airline employee can rollover certain airline payments. Qualified airline employees who received airline payment(s) may be able to exclude from income a portion of any payment(s) received that are rolled over to a traditional IRA. The maximum amount that can be rolled over to a traditional IRA is 90 percent of the total airline payment(s) received. The roll over to a traditional IRA generally must be done within 180 days of receipt of the airline payment. If the airline payment was made under the approval of an order of a federal bankruptcy court in a case filed on November 29, 2011, however, the airline employee can roll over the airline payment within the period beginning on December 18, 2014, and ending on June 15, 2016. Refer to Pub 590-A, Contributions to Individual Retirement Arrangements (IRAs), for additional information.

    • All FAA airline payment cases are centralized in Memphis. If another site receives a FAA airline payment case in their inventory, reassign the case to ≡ ≡ ≡ ≡ ≡ ≡ ≡ .

    • Taxpayers may write "Airline Payment" on the top of the Form 1040X or indicate "Airline Payment" in the explanation why the return is being amended.

    • These cases should not be denied.

    • If the only issue on the Form 1040X is the airline payment, the form should not be referred to Cat A for review.

    Reminder:

    The normal statute of limitations applies to amended returns filed to exclude from income amounts rolled into a traditional IRA.

  9. Only one rollover per one year period is permitted per taxpayer. Refer to Pub 590-A, Contributions to Individual Retirement Arrangements (IRAs), for additional information.

Individual Retirement Arrangement (IRA) Procedures

  1. This section provides information on:

    • Individual Retirement Arrangements (IRAs)

    • Coverdell Education Savings Accounts (ESAs)

    • Archer Medical Savings Accounts (MSAs) and Long-Term Care Insurance Contracts

    • Health Savings Accounts (HSAs)

    • Individual Retirement Account File (IRAF) (MFT 29)

Nondeductible IRA Contributions/Form 8606

  1. Nondeductible contributions are those contributions to a traditional IRA which are within the contribution limit but do not qualify as deductible or the taxpayer chooses not to deduct them.

  2. Earnings on nondeductible contributions are not taxed until distributed.

  3. Nondeductible contributions are not taxed when withdrawn from the IRA.

  4. Form 8606, Nondeductible IRAs, is used to report:

    • Nondeductible IRA contributions

    • Distributions from traditional, SEP, or SIMPLE IRAs, if nondeductible contributions to traditional IRAs were made in the current year

    • Distributions from Roth IRAs

    • Conversions from traditional, SEP, or SIMPLE IRAs to Roth IRAs

  5. Taxpayers meeting requirements to file Form 8606, Nondeductible IRAs, must file the form even if they do not file a tax return for the tax year. Refer to instructions for Form 8606, Instructions for Form 8606, Nondeductible IRAs, for additional information.

  6. Whenever a Form 8606 without a return is received in Accounts Management and the original return has posted, refer to the following table:

    If And Then
    You can determine that no adjustment will be necessary You have the actual Form 8606 Locate and associate the loose form with the controlling document locator number (DLN). Use a Form 3210, Document Transmittal, when forwarding to another location. If the original return was filed electronically, refer to IRM 21.6.6.3.26, Electronic Filing System (e-file).
    You can determine that no adjustment will be necessary The Form 8606 was scanned into the Correspondence Imaging System (CIS) CIS images do not have to be associated with the original return. A case note can be added to quickly identify the loose form. Refer to IRM 21.5.1.5.3, CIS Source Documentation, for additional information.
    You are unable to determine whether an adjustment is needed You have the actual Form 8606
    1. Return the Form 8606 to the taxpayer.

    2. Advise the taxpayer that a Form 1040X, Amended U.S. Individual Income Tax Return, is required to amend the original return.

    You are unable to determine whether an adjustment is needed The Form 8606 was scanned into CIS CIS images do not have to be returned to the taxpayer. Advise the taxpayer that a Form 1040X, Amended U.S. Individual Income Tax Return, is required to amend the original return.
  7. Whenever a Form 8606 without a return is received in Accounts Management and the original return has not posted, refer to the following table:

    If And Then
    You can determine that no adjustment will be necessary You have the actual Form 8606 Input a transaction code (TC) 930 push code, if appropriate, to file the information. Refer to IRM 21.5.1.4.4.1, TC 930 Push Codes and IRM 21.5.1.4.4.2, Inappropriate Use of TC 930 Push Codes.
    You can determine that no adjustment will be necessary The Form 8606 was scanned into CIS Do not input the push code if the document was scanned in CIS. Refer to IRM 21.5.1.5.7, CIS Push Codes, for additional information.
    You are unable to determine whether an adjustment will be necessary or if you can determine that an adjustment will be needed You have the actual Form 8606 and there is an indication the return has been filed or will be filed. Refer to IRM 21.4.1.3.1, Locating the Taxpayer’s Return, for additional information.

    Note:

    Consider any form received prior to the return due date as an indication the taxpayer will file.

    Input a TC 930 push code using your employee number as indicated in IRM 21.5.1.4.4.1, TC 930 Push Codes.

    Reminder:

    In certain instances, TC 930 push codes procedures should not be used. Refer to IRM 21.5.1.4.4.2, Inappropriate Use of TC 930 Push Code.

    You are unable to determine whether an adjustment will be necessary or if you can determine that an adjustment will be needed The Form 8606 was scanned into CIS and there is an indication the return has been filed or will be filed. Input a TC 930 push code. Refer to IRM 21.5.1.5.7, CIS Push Codes, for additional information.
    An adjustment will or will not be needed You have the actual Form 8606 and there is no indication the return has been filed and it is beyond the return due date
    1. Return the Form 8606 to the taxpayer.

    2. Advise the taxpayer to file the Form 8606 with their Form 1040, U.S. Individual Income Tax Return.

    An adjustment will or will not be needed The Form 8606 was scanned into CIS and there is no indication the return has been filed and it is beyond the return due date CIS images do not have to be returned to the taxpayer. Advise the taxpayer to file the Form 8606 with their Form 1040 , U.S. Individual Income Tax Return.
  8. If taxpayer is not required to file a return and a Form 8606 was received refer to the following table:

    If And Then
    No return was filed and taxpayer is not required to file a return You have the actual Form 8606 Forward the Form 8606 to Files on a Form 3210, Document Transmittal with the notation "To be filed in Alpha Files" .
    No return was filed and taxpayer is not required to file a return The Form 8606 was scanned into CIS CIS images do not have to be associated with al return. A case note can be added to quickly identify the loose form. Refer to IRM 21.5.1.5.3, CIS Source Documentation, for additional information.
  9. If the taxpayer submits a $50 penalty payment, refund payment to taxpayer with a letter explaining the penalty is currently not assessed.

Individual Retirement Arrangement (IRA) Taxes

  1. If the taxpayer does not conform to the rules governing IRAs, additional taxes are assessed. These taxes are assessed on the Individual Master File (IMF) and/or the Individual Retirement Account File (IRAF).

  2. Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, is used to report additional taxes on:

    • Individual Retirement Arrangements (IRAs)

    • Other qualified retirement plans

    • Coverdell Education Savings Accounts (ESAs)

    • Qualified Tuition Programs (QTPs)

    • Archer Medical Savings Accounts (MSAs)

    • Health Savings Accounts (HSAs)

Excess Contributions Tax

  1. An excess contribution is an amount contributed to the taxpayer's Individual Retirement Arrangement (IRA) in excess of the amount of compensation for the tax year, or the IRA contribution limit that applies to the taxpayer for that year. Refer to IRM 21.6.5.4.6.1, Contribution Limits, and IRM 21.6.5.3.1, Traditional Individual Retirement Arrangement (IRA), for information about contribution limits.

  2. The 6 percent excise tax is assessed on the Individual Retirement Account File (IRAF, MFT 29), each year on any excess amount in an IRA account.

  3. The 6 percent excise tax is not assessed if excess contributions, plus earnings, are withdrawn before the return due date, including extensions:

    1. The 6 percent tax is assessed for the year an excess contribution was made and each year after, until the excess is withdrawn, or later exhausted as an allowable current year contribution.

    2. The person entitled to the deduction for either a traditional or spousal IRA must pay the tax on excess contributions.

    3. The tax cannot be more than 6 percent of the value of the IRA on the last day of the year.

Early Distributions

  1. Early distributions are amounts withdrawn, or considered withdrawn, from an Individual Retirement Arrangement (IRA) before the owner reaches age 591/1.

  2. When the IRS issues a levy on an IRA account to cover back taxes, this is a taxable distribution to the account owner even though the funds are transferred directly from the account to the IRS and not actually received by the owner. However, the 10 percent additional tax does not apply to distributions attributable to an IRS levy. Refer to Pub 590-A, Contributions to Individual Retirement Arrangements (IRAs) and Pub 590-B, Distributions from Individual Retirement Arrangements (IRAs), for additional information.

    • Early distributions are included in gross income and may be subject to 10 percent additional tax.

      Note:

      Nondeductible contributions are not included in the gross income when distributed.

    • The 10 percent additional tax is assessed on IMF (MFT 30), not IRAF (MFT 29).

  3. If a taxpayer borrows from their IRA, or otherwise engages in a prohibited transaction under Code Section 4975 with respect to the IRA, then the IRA ceases to be an IRA. The taxpayer is considered to have received a distribution of their entire interest in the IRA. The IRA distribution is equal to the fair market value of the IRA as of January 1st of the taxable year in which the prohibited transaction occurs. In addition, if a taxpayer uses the IRA as security for a loan, the taxpayer is considered to have received a distribution from the IRA of the amount used. These distributions are subject to the 10 percent tax on early distributions from qualified plans and cannot be rolled over.

  4. The 10 percent additional tax does not apply to early distributions which are:

    1. Received after permanent and total disability of the owner.

    2. Received after the death of the owner.

    3. Rolled over to another retirement plan or IRA (including conversions to Roth IRAs).

    4. Part of a series of substantially equal payments made over the owner’s life (or the joint lives of the owner and owner's beneficiary). Refer to Pub 590-B, Distributions from Individual Retirement Arrangements (IRAs), for additional information.

    5. Certain returns of contributions, but not the earnings on these contributions.

    6. Used to pay medical expenses in excess of 7.5 percent of AGI prior to January 1, 2013; or beginning January 1, 2013, used to pay medical expenses in excess of 10 percent of AGI. (Through 2016, the 7.5 percent limit applies if the taxpayer or spouse is 65 or older by the end of the year.)

    7. Used by certain unemployed or certain self-employed taxpayers to pay health insurance premiums.

    8. Used for qualified higher education expenses.

    9. Distributions (up to $10,000) used to buy or rebuild a first home.

    Note:

    Refer to additional exceptions in the Instruction 5329, Instructions for Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts.

  5. The Pension Protection Act of 2006, (Pub L No. 109-280) enacted on August 17, 2006, allows qualified military reservists to take IRA distributions without incurring liability for the additional tax on early distributions. Under the provision:

    • A qualified reservist distribution is not subject to the additional tax on early distributions. The 10 percent early distribution tax that normally applies to most retirement distributions received before age 59 1/2 is eliminated for eligible military reservists.

    • Eligible military reservists are reservists who were ordered or called to active duty after September 11, 2001.

    • Eligible military reservists also include reservists who were ordered or called to active duty for a period of more than 179 days or for an indefinite period because they are a member of a reserve component.

    • A qualified reservists distribution is a distribution from an IRA or from amounts attributable to elective deferrals under a section 401(k) or 403(b) plan or a similar arrangement.

    • If the 10 percent tax was already paid on a distribution, eligible reservists may file Form 1040X, Amended U.S. Individual Income Tax Return, to claim a refund. The words "Active Duty" should be written on the top of the form. Part II, Explanation of Changes, should include the date they were called to active duty, the amount of the retirement distribution and the amount of early distribution tax paid.


    Refer to Pub 590-B, Distributions from Individual Retirement Arrangements (IRAs), for additional information.

  6. If the taxpayer has filed an amended return and includes income from an Early Distribution that may be subject to the 10 percent additional tax, DO NOT assess the 10 percent tax, if the taxpayer does not include the Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts. Process the amended return and forward the case to Exam after verifying that the early distribution is subject to the 10 percent tax and meets the following criteria:

    • ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    • ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    Note:

    Do not request the Form 5329 if not included with the amended return.

    Refer to Pub 590-A, Contributions to Individual Retirement Arrangements (IRAs), and Pub 590-B, Distributions from Individual Retirement Arrangements (IRAs), for additional information.

  7. First-time homebuyers may be able to use an exception to limit or avoid a 10 percent additional tax on up to $10,000 of the distributions when they are used to buy, build, or rebuild a principal residence. If the requirements of the exception cannot be met because the planned purchase or construction of the home falls through, the law allows the taxpayer to return the distribution to an IRA within 120 days in order to avoid the tax. Refer to Pub 590-B, Distributions from Individual Retirement Arrangements (IRAs), for additional.

Excess Accumulations

  1. Upon reaching the age of 701/1, owners of traditional IRAs are required to start receiving at least minimum distributions from their IRAs (refer to Roth IRAs later in this section for required minimum distributions from Roth IRAs). Excess accumulations result when actual distributions from an IRA during the year are less than the required minimum distribution for the year.

    1. A taxpayer must receive the initial distribution by April 1 of the year following the year in which he/she reaches age 701/1.

    2. Subsequent required distributions (including the one for the year following the year owner reaches 701/1) must be made by December 31 of each year.

    3. The taxpayer may be subject to a 50 percent excise tax on the difference between the required distribution and the actual distribution.

  2. The Pension Protection Act of 2006, enacted on August 17, 2006, (Pub L No. 109-280), provides an exclusion from gross income for taxpayers at least 701/1 years of age who contribute funds from their IRA to a charitable organization. This is known as a Qualified Charitable Distribution (QCD). As of 2015 this has been permanently extended. This exclusion may not exceed $100,000 per taxpayer in any tax year.

  3. A 50 percent excise tax is assessed on excess accumulations and is assessed on the Individual Retirement Arrangement File (IRAF), MFT 29.

  4. The excise tax is waived if the taxpayer establishes that the excess accumulation was due to a reasonable cause and reasonable steps are being taken to remedy the situation. Refer to Pub 590-B, Distributions from Individual Retirement Arrangements (IRAs), for additional information. An IRAF (MFT 29) account must be established before a waiver can be granted. Refer to IRM 21.6.5.4.11.4, Processing Form 5329 With TC 971 AC 144, for procedures to establish the IRAF (MFT 29) account.

Roth Individual Retirement Arrangement (IRA)

  1. With a Roth IRA:

    • Contributions are nondeductible.

    • Distributions may be tax-free depending on when and for what purpose the taxpayer withdraws money from the account.

    • Account must be designated as a Roth IRA when it is established.

  2. Trustees of any type of IRA report information regarding distributions and contributions on Form 1099-R, Distribution From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., and Form 5498, IRA Contribution Information.

Contribution Limits
  1. Contribution limits for traditional IRAs and Roth IRAs are coordinated. The maximum total yearly contribution that can be made by an individual to all individual IRAs is the lesser of the individual’s taxable compensation for the year (this does not include rollovers.), or the following amounts:

    Year Contribution Limit Additional if age 50 or older
    2014 - 2017 $5,500 $1,000


    A taxpayer’s Roth IRA contributions may be limited by his or her modified adjusted gross income (MAGI). Refer to Pub 590-A, Contributions to Individual Retirement Arrangements (IRAs), for additional information. Refer to Pub 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad, for information pertaining to foreign exclusions or deductions.

  2. Taxpayers are allowed to contribute to a Roth IRA after age 701/1.

  3. Excess contributions are subject to 6 percent tax under IRC 4973.

Excess Contribution
  1. An excess contribution is an amount contributed to the taxpayer's Individual Retirement Arrangement (IRA) in excess of the amount of compensation for the tax year, or the IRA contribution limit that applies to the taxpayer for that year. Refer to IRM 21.6.5.4.3, Excess Contributions Tax, IRM 21.6.5.4.6.1, Contribution Limits, and IRM 21.6.5.3.1, Traditional Individual Retirement Arrangement (IRA), for information about contribution limits.

Phase Out (Income Limit)
  1. The maximum yearly contribution that can be made to a Roth IRA is phased out based on modified adjusted gross income (MAGI) and filing status as follows:

    Year Married Filing Joint or Qualifying Widow(er) Married Filing Separately Single, Head of Household, or All Others
    2017 At least $186,000 to $196,000 $10,000 or more At least $118,000 but less than $133,000
    2016 At least $184,000 to $194,000 $10,000 or more At least $117,000 but less than $132,000
    2015 At least $183,000 to $193,000 $10,000 or more At least $116,000 but less than $131,000
    2014 At least $181,000 to $191,000 $10,000 or more At least $114,000 but less than $129,000

    Note:

    Once the maximum phase out amounts shown in the table are reached, the taxpayer will not be allowed to make a contribution to a Roth IRA.


    Refer to Pub 590-A, Contributions to Individual Retirement Arrangements (IRAs), for additional information.

Qualified Distributions
  1. Qualified distributions from a Roth IRA are not includible in gross income and are not subject to 10 percent tax on early withdrawals.

  2. A qualified distribution is any payment or distribution from a Roth IRA where it has been at least five years from the beginning of the year in which the taxpayer first set up and contributed to a Roth IRA, and the distribution is:

    • Made on or after the taxpayer reaches age 591/1, or

    • Made upon death or disability, or

    • Made for a first-time home purchase.

    Note:

    Refer to IRM 21.6.5.4.6.5, Five-Year Holding Period, for additional information.

  3. Refer to Pub 590-B, Distributions from Individual Retirement Arrangements (IRAs), for more information on qualified distributions.

Five-Year Holding Period
  1. The five-year holding period is satisfied if Roth distributions (including distributions allocable to conversion contributions) are not made before the end of the five-tax year period beginning with the first tax year that the taxpayer made a contribution to a Roth IRA.

  2. As with other IRAs, a regular contribution can be made for a year if it’s made by the due date for filing a tax return for the year, without regard to extensions. In this case, the five tax year holding period begins with the tax year for which a contribution is first made to a Roth IRA. A subsequent contribution does not start a new five-year period.

Nonqualified Distributions
  1. Nonqualified distributions may be includible in gross income. Contributions are withdrawn tax-free. Earnings are included in gross income and may be subject to 10 percent tax on early withdrawals. Refer to Pub 590-B, Distributions from Individual Retirement Arrangements (IRAs), for additional information on nonqualified distributions from a Roth IRA.

  2. Distribution of a Roth conversion amount within five years of the conversion may cause the 10 percent additional tax on early distributions to be imposed; even if the amount distributed is not includible in gross income. Refer to Pub 590-A, Contributions to Individual Retirement Arrangements (IRAs) and Pub 590-B, Distributions from Individual Retirement Arrangements (IRAs), for additional information.

  3. When evaluating nonqualified distributions from a Roth IRA:

    1. Distributions are treated as made from regular contributions first and then conversion contributions on a first in first out (FIFO) basis.

    2. All of an individual’s Roth IRAs are treated as a single Roth IRA.

    3. No part of a distribution is treated as earnings until the total of all distributions from all the taxpayer’s Roth IRAs exceed the amount of contributions to all the taxpayer’s Roth IRAs.

Minimum Distribution
  1. The minimum distribution rules applying to other IRAs generally do not apply to Roth IRAs while the owner is alive.

  2. However, after the death of a Roth IRA owner, certain minimum distribution rules that apply to traditional IRAs also apply to Roth IRAs. Refer to Pub 590-B, Distributions from Individual Retirement Arrangements (IRAs), for additional information.

Rollovers and Conversions into Roth IRAs
  1. When transferring assets from a qualified plan, traditional IRA or Roth Ira:

    1. Distributions from a Roth IRA and eligible rollover distributions from a qualified plan may be rolled over tax-free to another Roth IRA.

    2. Amounts in a traditional IRA can be converted into a Roth IRA.

    3. Amounts converted from a traditional IRA to a Roth IRA must be included in gross income as if they had been distributed from the traditional IRA or qualified plan except the 10 percent tax does not apply. Refer to Pub 590-A, Contributions to Individual Retirement Arrangements (IRAs), for additional information.

    Note:

    Income resulting from the conversion of a traditional IRA to a Roth IRA is reported on the income tax return for the year the funds exited the traditional IRA.

    Example:

    If the funds were distributed to the taxpayer in 2010, who then rolled over the funds to a Roth IRA in 2011 (within 60 days), the conversion income is reported for 2010.

  2. To reverse a conversion of a traditional IRA to a Roth IRA, the taxpayer may recharacterize the conversion contribution by the due date (including extensions) of the tax return for the tax year during which the contribution was made.

    Note:

    Refer to Pub 590-A, Contributions to Individual Retirement Arrangements (IRAs), for additional information.

    Note:

    These transfers may be between IRA trustees and IRA custodians or IRAs with same trustee or custodian; both traditional IRA and Roth IRA contributions may also be recharacterized.

Coverdell Education Savings Accounts (ESAs)

  1. Effective for taxable years beginning after December 31, 1997, eligible individuals (subject to modified adjusted gross income limitations) may establish and contribute cash only to a Coverdell Education Savings Account (ESA). Contributions to an ESA are not deductible, but amounts deposited grow tax free until distributed. The total of all contributions to all ESAs for any one beneficiary cannot be more than $2,000 per year. Pub. L. No. 107-16 revised Coverdell rules to cover elementary and secondary education expenses if special requirements are met for each taxable year. Contributions can be made, without penalty, to both a Coverdell and Qualified Tuition Program in the same year for the same beneficiary.

  2. Any distribution that exceeds qualified education expenses is taxed under IRC 72 annuity rules.

  3. The American Opportunity, Hope or Lifetime credit can be claimed in the same year the beneficiary takes a tax-free distribution from Coverdell ESA, as long as the same expenses are not used for both benefits. This means the beneficiary must reduce qualified higher education expenses by tax-free educational assistance, and then further reduce them by any expenses taken into account in determining an American Opportunity, Hope or Lifetime learning credit.

    Note:

    The taxpayer should receive a Form 1099-Q, Payments From Qualified Education Programs, for the breakdown. If taxpayer states no form received, refer to Pub 970, Tax Benefits for Education, Chapter 7, Coordination With American Opportunity and Lifetime Learning Credits, for calculations of the credit

    .

  4. The earnings portion of a distribution that exceeds qualified education expenses is included in gross income and is subject to a 10 percent additional tax unless an exception applies. This additional tax is reported on Part II, Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts.

  5. The Military Family Tax Relief Act of 2003 (Pub. L. No. 108-121) exempts the additional 10 percent tax for withdrawals from Coverdell Education accounts for non-educational use, because of attendance at United States service academies (i.e., U.S. Military Academy, U.S. Naval Academy, U.S. Air Force Academy, U.S. Coast Guard Academy, or the U.S. Merchant Marine Academy).

    • Withdrawals not subject to the additional tax.

    • The requirement to include in income the earnings portion of distributions that are not used for qualified education expenses has not changed.

    • The provision applies to taxable years beginning after December 31, 2002.

  6. The 10 percent additional tax will not apply if excess contributions and earnings attributable to the excess are distributed before the first day of the sixth month of the following tax year.

  7. Excess contributions are subject to a 6 percent excise tax under IRC section 4973.

  8. Refer to Pub 970, Tax Benefits for Education, for more information about Coverdell ESAs.

Rollover of Coverdell Education Savings Accounts
  1. Before a beneficiary reaches age 30, the balance in a Coverdell Education Savings Account may be transferred or rolled over into another Coverdell Education Savings Account for the beneficiary or a member of the former beneficiary’s family (including the beneficiary's spouse) who is under age 30. This age limitation does not apply if the new beneficiary is a special needs beneficiary. Refer to Pub 970, Tax Benefits for Education, for more information.

  2. Transfers upon death or divorce to a spouse/member of beneficiary’s family under age 30 are generally not taxable and the spouse or family member treats the account as his or her own.

Qualified Tuition Programs (QTP) (529 Plans)
  1. Certain colleges and universities may sponsor prepaid tuition programs under Section 529. Both prepaid and savings programs may be sponsored by states. Refer to Pub 970, Tax Benefits for Education, for additional information.

    Note:

    Contributions to Qualified Tuition Programs (QTP) are considered gifts under federal gift tax regulations. For gifts made in 2009-2012, gift tax is owed (subject to the donor’s lifetime applicable credit) on any contributions for the same child in excess of $13,000 ($65,000 over a five-year period) per donor or $26,000 ($130,000 over a five-year period) per married couple. The five-year period is known as the five-year carry-forward option. Once a donor contributes $65,000 or a married couple contributes $130,000 and elects the five-year carry-forward option on Form 709, they are not able to make another contribution (gift) for that child (without reporting gift tax) for five years. On or after January 1, 2013, the gift tax annual exclusion is $14,000; therefore, gift tax is owed (subject to the donor’s lifetime applicable credit) on any contributions for the same child in excess of $14,000 ($70,000 over a five-year period) per donor or $28,000 ($140,000 over a five-year period) per married couple.

  2. Section 529 requires that a qualified tuition program sponsored by an eligible educational institution (defined in Section 481 of the Higher Education Act of 1965: 20. U.S. 1088) must hold amounts in a qualified trust, and must have received a ruling or determination from the Service that the qualified tuition program meets the applicable requirements.

  3. A taxpayer may contribute to both a Coverdell Education Savings Account and to a Section 529 Program in the same year. Refer to Pub 970, Tax Benefits for Education, for more information about QTP.

  4. Refer to Section 530(b)(2)(A)(i) and Section 529(e)(3) that further define qualified higher educational expenses which can be paid with funds from a Coverdell Education Savings Account or a Section 529 program.

  5. The earnings portion of a Qualified Tuition Program (QTP) distribution that exceeds qualified higher education expenses is included in gross income and is subject to a 10 percent additional tax unless an exception applies. This additional tax is reported on Part II, Form 5329, Additional Taxes on Qualified Plans (including IRAs) and Other Tax-Favored Accounts.

  6. Beginning in 2004, a distribution from a QTP established and maintained by an eligible educational institution (generally private colleges and universities) can be excluded from income if the amount distributed is not more than qualified educational expenses. For more information on tax-free QTP distributions, refer to Chapter 8 in Pub 970, Tax Benefits for Education.

  7. The Military Family Tax Relief Act of 2003 (Pub. L. No. 108-121) exempts the additional 10 percent tax for withdrawals from Section 529 QTP accounts for non-educational use, because of attendance at United States service academies (i.e., U.S. Military Academy, U.S. Naval Academy, U.S. Air Force Academy, U.S. Coast Guard Academy, or the U.S. Merchant Marine Academy). Refer to IRM 21.6.5.1, Individual Retirement Arrangements (IRA), Coverdell Education Savings Accounts (ESA), Archer Medical Savings Accounts (MSA) and Health Savings Accounts (HSA) Overview, for additional information.

Archer (MSA) and Long-Term Care Insurance Contracts

  1. The Health Insurance Portability and Accountability Act of 1996 permitted eligible individuals to establish Archer Medical Savings Accounts (MSA). The Balanced Budget Act of 1997 allowed the establishment of a Medicare Advantage MSA. The Community Renewal Tax Relief Act of 2000 extended MSA until 2002. Refer to IRM 21.6.5.4.8.1, Medicare Advantage MSA, for additional details.

  2. The Tax Relief and Health Care Act of 2006 expired on December 31, 2007. After that date, no new Archer MSA’s can be established, but Archer MSA’s established before that date can continue to be used and receive contributions.

  3. An Archer MSA is:

    • Established, created, or organized in the United States

    • Exclusively for the purpose of paying the qualified medical expenses of the account holder, spouse or dependent in conjunction with a high deductible health plan, and

    • Subject to rules similar to those applicable to IRAs

  4. Archer MSAs are available to:

    • Employee (or employee's spouse) covered under an employer sponsored high deductible health plan of a small employer.

    • Self-employed individual (or spouse of self-employed individual) with coverage under a high deductible health plan.

  5. A high deductible health plan has the following limits for annual deductible with applicable cost-of-living adjustments:

    Deductible and Out-of-Pocket Expenses for Tax Year 2017 Self-only Coverage Family Coverage
    Minimum Annual Deductible $2,250 $4,500
    Maximum Annual Deductible $3,350 $6,750
    Maximum Annual Out-of-Pocket Expenses $4,450 $8,250
    Deductible and Out-of-Pocket Expenses for Tax Year 2016 Self-only Coverage Family Coverage
    Minimum Annual Deductible $2,250 $4,450
    Maximum Annual Deductible $3,350 $6,700
    Maximum Annual Out-of-Pocket Expenses $4,450 $8,150
    Deductible and Out-of-Pocket Expenses for Tax Year 2015 Self-only Coverage Family Coverage
    Minimum Annual Deductible $2,200 $4,450
    Maximum Annual Deductible $3,300 $6,650
    Maximum Annual Out-of-Pocket Expenses $4,450 $8,150
    Deductible and Out-of-Pocket Expenses for Tax Year 2014 Self-only Coverage Family Coverage
    Minimum Annual Deductible $2,200 $4,350
    Maximum Annual Deductible $3,250 $6,550
    Maximum Annual Out-of-Pocket Expenses $4,350 $8,000


  6. Contributions to an Archer MSA are deductible if made by the account holder and excludible if made by his/or her employer up to a limit. Refer to Pub 969, Health Savings Accounts and Other Tax-Favored Health Plans, for more information.

  7. For tax years beginning after December 31, 2010, nonprescription medicines (other than insulin) no longer qualify for Archer MSA purposes.

  8. The taxpayer may have to pay additional tax if the contributions are more than the allowable deduction (does not apply to Medicare Advantage MSA). The tax is:

    • Reported on Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, Part VI, Additional Tax on Excess Contributions to Archer MSAs.

    • Assessed on IRAF, MFT 29. Refer to Refer to IRM 21.6.5.4.11, Individual Retirement Account File (IRAF) Overview, for more information on IRAF assessments.

    • The smaller of 6 percent of the excess contributions or the value of the MSA on the last day of the tax year.

  9. The taxpayer may withdraw some or all of the excess contributions, by the due date of the return (including extensions). The withdrawn contributions will not be taxed as excess contributions if:

    • No deduction is claimed for the amount of the contribution withdrawn.

    • Any income earned on the withdrawn contributions is also withdrawn.

    • The withdrawn income, earned on withdrawn contributions, is included in the account holder’s gross income under other income on the tax return for the year the withdrawal of the contribution and earnings occurred.

  10. Earnings on amounts in an Archer MSA are not taxable.

  11. Generally, distributions from an Archer MSA for qualified medical expenses (unreimbursed medical expenses that could otherwise be deductible on Schedule A, Itemized Deductions) are excludible from the account holder’s gross income.

  12. The taxpayer is liable for tax on any taxable Archer MSA distributions not for qualified medical expenses. The tax is:

    • Reported on Form 1040, U.S. Individual Tax Return.

    • Assessed on the IMF, MFT 30.

  13. The taxpayer is liable for an additional tax on the taxable Archer MSA distributions, if an exception does not apply. The tax is:

    • Reported on Form 8853, Archer MSAs and Long Term Care Insurance Contracts, Section A, Part II, Archer MSA Distributions.

    • Assessed on the IMF, MFT 30.

      Tax Year Additional Tax
      2014 - 2017 20 percent
  14. For more information on Archer MSAs, refer to Pub 969, Health Savings Accounts and Other Tax-Favored Health Plans.

Medicare Advantage MSA
  1. The Balanced Budget Act of 1997 permits eligible individuals to establish a Medicare Advantage Medical Savings Account (MSA), IRC 138. MSAs are administered through the federal Medicare program. Refer to Pub 969, Health Savings Accounts and Other Tax-Favored Health Plans, for more information on Medicare Advantage MSAs.

  2. Medicare Advantage MSA distributions are reported on Form 8853, Archer MSAs and Long Term Care Insurance Contracts, Section B, Medicare Advantage MSA Distributions.

  3. Refer to the table below for Medicare Advantage MSA guidelines:

    If Then
    Medicare Advantage MSA Individual must be enrolled in Medicare.
    Medicare Advantage MSA Must have a high deductible health plan that meets Medicare guidelines.
    Medicare Advantage MSA Contributions to the account are made only by Medicare.
    Medicare Advantage MSA Contributions and earnings are not taxable while in the account.
    Distributions are not used for qualified medical expenses of the account holder. Distributions are taxable.
    Distributions are not used for qualified medical expenses of the account holder. Distributions are reported on Form 8853, Archer MSAs and Long-Term Care Insurance Contracts and may be subject to an additional 50 percent tax. The Form 8853 must be filed with the tax return if individual has a Medicare Advantage MSA. Refer to Pub 969, Health Savings Accounts and Other Tax-Favored Health Plans, for additional information.
Form 8853, Archer MSAs and Long-Term Care Insurance Contracts
  1. The Form 8853, Archer MSAs and Long-Term Care Insurance Contracts, for returns filed after 2000, was extensively revised to add Medicare Advantage MSA Accounts.

  2. Form 8853 must be filed if, during the tax year, the taxpayer or spouse (if filing joint):

    1. Is an employee or employer that made contributions to an existing Archer MSA.

    2. Received distributions from an existing Archer MSA or Medicare Advantage MSA.

    3. Acquired an interest in a Archer MSA or Medicare Advantage MSA due to the death of the account holder.

    4. Received distributions from a long-term care insurance contract.

    5. Received certain accelerated death benefits from a life insurance contract.

  3. Section B, Medicare Advantage MSA Distributions, is used to report Medicare Advantage MSA Distributions, figure taxable distributions and additional tax.

  4. Section C, Long Term Care (LTC) Insurance Contracts, is used to report Long-Term Care Insurance contracts.

Form 8853, Archer MSAs and Long-Term Care Insurance Contracts, Part I Archer MSA Contributions and Deductions
  1. Within limits, contributions to an Archer MSA are:

    • Deductible if made by eligible individuals

    • Excludable if made by the employer

      Exception:

      The exclusion does not apply to contributions made through a cafeteria plan.

  2. The taxpayer or spouse may not contribute to an Archer MSA if the employer made any contributions ( Form W-2, Wage and Tax Statement, Box 12 with Code R).

  3. The deduction is limited to:

    • 65 percent of the annual deductible (self-only coverage)

    • 75 percent of the annual deductible (family coverage)

  4. Contributions for a particular tax year can be made until the due date (without regard to extensions) of the individual income tax return for that year.

  5. The Archer MSA deduction is the smallest of:

    • The amount of contributions for the year.

    • The amount of compensation from the employer sponsoring the high deductible health plan.

    • The net earnings from self-employment (if applicable), or

    • The MSA limitation.

Form 8853, Archer MSAs and Long-Term Care Insurance Contracts, Part II - Archer MSA Distributions
  1. The taxpayer is taxed on all distributions received in the tax year from all Archer MSAs to the extent the distributions were not used for qualified medical expenses of the account holder, his spouse, or dependents.

  2. Distributions not for medical expenses are also subject to an additional tax unless made:

    • After age 65 (account holder)

    • After death (account holder)

    • After disability (account holder)

  3. The additional tax is as follows:

    Tax Year Additional Tax
    2014-2017 20 percent
  4. The taxpayer may rollover a distribution (withdrawal) of assets from one Archer MSA into another Archer MSA or health savings account (HSA). Generally, the distribution must be rolled over within 60 days following the distribution to qualify as tax-free.

    Note:

    A trustee-to-trustee transfer of funds from an Archer MSA directly to another Archer MSA or HSA is not considered a rollover for purposes of the one rollover per year rule.

  5. Form 8853, Section A, Part II, is used for computing any taxable distributions and the additional tax.

Form 8853, Archer MSAs and Long-Term Care Insurance Contracts, Section B, Medicare Advantage MSA Distributions
  1. Medicare Advantage Medical Savings Account (MSA) distributions are reported on Form 8853, Section B.

  2. The taxpayer does not make contributions to a Medicare Advantage MSA account. Contributions are governed by Part B of title XVIII of the Social Security Act (Medicare makes contributions to the account).

  3. The taxpayer is taxed on distributions received in the tax year to the extent the distributions were not used for unreimbursed qualified medical expenses.

  4. Distributions not for unreimbursed qualified medical expenses are also subject to an additional 50 percent tax to the extent they reduce the prior year account balance below an established floor unless made after the account holder:

    • becomes disabled, or

    • is deceased

      If And Then
      The account holder dies The designated beneficiary is the account holder’s surviving spouse The Medicare Advantage MSA account is treated as a regular MSA of the spouse.
      The account holder dies There are any distributions after the date of death They are reported in Section B.
      There are any qualified medical expenses incurred by the account holder before date of death Paid by the surviving spouse within one year after the date of death Include on line 7 of Section A, Part II.
      The account holder dies The designated beneficiary is not the account holder’s surviving spouse The account ceases to be an MSA as of the date of death and the fair market value of the account is included in the beneficiary’s gross income.
      There are any qualified medical expenses incurred by the account holder before date of death Paid by the beneficiary within one year after the date of death Information is reported in Section B and the distribution is not subject to tax to the extent of the qualified medical expenses.
  5. Trustee-to-Trustee transfers of Medicare Advantage MSA accounts are permitted.

  6. A separate Form 8853, with Section B completed, must be filed for each spouse if both spouses received distributions from a Medicare Advantage MSA.

Form 8853, Archer MSAs and Long-Term Care Insurance Contracts, Section C, Long-Term Care (LTC) Insurance Contracts
  1. The taxpayer must complete Form 8853, Section C, if the taxpayer (policyholder) or spouse (if filing jointly) was a policyholder who received payments made on a per diem or other periodic basis under a qualified LTC insurance contract or received certain accelerated death benefits on a per diem or other periodic basis.

  2. A separate Form 8853, Section C, must be filed for each insured person for whom the taxpayer received payments.

  3. Any taxable benefits are reported on Form 8853, Section C, Line 26 and on line 21 of Form 1040, U.S. Individual Tax Return.

  4. The individual owning the proceeds of the qualified LTC contract is required to report the income for tax purposes, regardless of whether the payment is assigned to a third party.

  5. Amounts paid as reimbursements for qualified LTC services under a qualified LTC contract are excluded from income.

    1. The excludable amount is limited if payments are made on a per diem basis or other periodic basis.

    2. The per diem exclusion limit must be allocated among all policyholders who own qualified LTC insured contracts for the same insured.

  6. Amounts paid as accelerated death benefits are fully excludable from income if the insured has been certified by a physician as terminally ill. These amounts are excludable, to the same extent they would be if paid under a qualified LTC insurance contract, if the insured has been certified by a licensed health care practitioner as chronically ill.

Health Savings Accounts (HSAs)

  1. Section 1201 of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (Pub. L. No. 108-173) permits eligible individuals to establish Health Savings Accounts (HSAs) for taxable years beginning after December 31, 2003. Amounts in an HSA may be accumulated over the years or distributed on a tax-free basis to pay or reimburse qualified medical expenses.

  2. An HSA is a tax-exempt trust or custodial account established exclusively for the purpose of paying qualified medical expenses of the beneficiary, who for the months the contributions are made to an HSA, is covered under a high-deductible health plan.

  3. The Affordable Care Act, Provision 9003, effective January 1, 2011 established that some expenses will no longer qualify as a "qualified medical expense" . Over-the-counter medicine will no longer be considered a qualified medical expense unless they are prescribed. This applies to purchases made on January 1, 2011 or later. Exceptions are medical devices, eye glasses, contacts, health insurance co-pays and deductibles are still qualified medical expenses and reimbursable after December 31, 2010.

  4. Many of the rules that apply to HSAs are similar to rules that apply to IRAs and Archer MSAs. An HSA is established for the benefit of an individual, is owned by that individual, and is portable. If the individual is an employee who later changes employers, or leaves the work force, the HSA does not stay with the former employer, but stays with the individual.

Who Is Eligible for Health Savings Accounts (HSAs)?
  1. An eligible individual can establish a Health Savings Account (HSA). An eligible individual (for any month) is:

    • Covered under a high deductible health plan (HDHP) on the first day of such month.

    • Not covered by another health plan that is not an HDHP (with certain exceptions for plans providing limited types of coverage).

    • Not enrolled in Medicare.

    • Not claimed as a dependent on another person’s tax return.

  2. Generally, an HDHP is a health plan that meets certain requirements for deductibles and out-of-pocket expenses.

  3. In the table below, the annual deductible (other than for premiums) are at least the amount given. The out-of-pocket expenses (deductibles, co-payments and other amounts, but not premiums) do not exceed the amount given.

    Tax Year Annual Deductible for Self-only Coverage Out-of-pocket Expenses for Self-only Coverage Annual Deductible for Family Coverage Out-of-pocket Expenses for Family Coverage
    2017 $1,300 $6,550 $2,600 $13,100
    2016 $1,300 $6,550 $2,600 $13,100
    2015 $1,300 $6,450 $2,600 $12,900
    2014 $1,250 $6,350 $2,500 $12,700
Health Savings Account (HSA) Contributions
  1. For a Health Savings Account (HSA) established by an employee, the employee, the employee’s employer or both may contribute to the HSA of the employee in a given year.

  2. For an HSA established by a self-employed (or unemployed) individual, the individual may contribute to the HSA.

  3. Family members may also make contributions to an HSA on behalf of another family member or any other person as long as that other family member is an eligible individual.

  4. The maximum annual contributions for individuals (and their spouses covered under the high deductible health plan (HDHP) age 55 and older at the end of the tax year, are as follows:

    Tax Year Annual Contribution for Self-only Coverage Catch-up Contribution for Self-only Coverage Annual Contribution for Family Coverage Catch-up Contribution for Family Coverage
    2017 $3,400 $1,000 $6,750 $1,000
    2016 $3,350 $1,000 $6,750 $1,000
    2015 $3,350 $1,000 $6,650 $1,000
    2014 $3,300 $1,000 $6,550 $1,000
  5. After an individual is enrolled in Medicare, contributions (including catch-up contributions) cannot be made to an individual’s HSA.

  6. HSA contributions made by an eligible individual, by a family member, or by any other person on behalf of an individual, are:

    • Deductible by the eligible individual in determining adjusted gross income.

    • Computed using Form 8889, Health Savings Accounts (HSAs), Part I, HSA Contributions and Deduction and reported on line 25 of the Form 1040, U.S. Individual Income Tax Return.

    • Not deductible as a medical expense itemized deduction.

    • Deductible if made in cash and not in the form of stock or other property.

    • Not deductible if the individual is being claimed as a dependent on another person's tax return.

    • Not deductible on Form 1040 or as medical expenses on Schedule A, if the HSA contributions were made by the employer.

  7. For calendar year taxpayers, the deadline for contributions to an HSA is generally April 15 following the year for which the contributions are made.

    Note:

    The maximum annual contribution may be made if an individual is an eligible individual as of December 1. If not, the contribution amount is determined on a monthly basis.

Excess Health Savings Accounts (HSA) Contributions
  1. Contributions by an employer to a Health Savings Account (HSA) for an employee are included in the gross income of the employee to the extent that they exceed the allowable contribution limits or if they are made on behalf of an employee who is not an eligible individual.

  2. An excise tax of 6 percent is imposed for excess individual and employer contributions. This excise tax is reported on Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, Part VII, Additional Tax on Excess Contributions to Health Savings Accounts (HSAs), and posted to the IRAF, MFT 29 account. Refer to IRM 21.6.5.4.11.7, Individual Retirement Account File (IRAF) Tax Adjustments, for information on adjusting IRAF, MFT 29 accounts.

Rollover Contributions to Health Savings Accounts (HSAs)
  1. Rollover contributions from Archer MSAs and other Health Savings Accounts (HSAs) into an HSA are permitted.

  2. Rollovers are not subject to the annual contribution limits.

  3. Rollovers from an IRA, from a health reimbursement arrangement or from a health flexible spending arrangement to an HSA may be permitted under certain circumstances. These rollovers are subject to annual contribution limits.

Health Savings Account (HSA) Distributions
  1. Distributions from a Health Savings Account (HSA) used exclusively to pay for qualified medical expenses of the account beneficiary, his or her spouse or dependents, are excludable from gross income. The amounts in an HSA can be used for qualified medical expenses and are excludable from gross income even if the individual is not currently eligible for contributions to the HSA.

  2. Qualified medical expenses are expenses paid by the account beneficiary, his or her spouse, or dependents for medical care as defined in IRC 213(d) but only to the extent the expenses are not covered by insurance or otherwise. The qualified medical expenses must be incurred after the HSA has been established.

  3. For purposes of determining the itemized deduction for medical expenses, medical expenses paid or reimbursed by distributions from an HSA are not treated as expenses paid for medical care under IRC 213.

  4. Health insurance premiums are not considered qualified medical expenses except for the following:

    • Qualified long-term care insurance.

    • Continuation coverage under federal law (e.g., Consolidated Omnibus Reconciliation Act (COBRA) or Uniformed Services Employment and Reemployment Rights Act (USERRA) coverage).

    • Health care coverage while an individual is receiving unemployment compensation.

    • Premiums for Medicare Part A or B, Medicare Health Maintenance Organization (HMO) and Medicare Advantage Plans (Part C of Medicare) (for individuals over age 65).

    • Preferred Provider Organization, Private Fee for Service Plans, and Special Needs Plans (for individuals over age 65).

    • Premiums for employer sponsored retiree health insurance (for individuals over age 65). For additional information refer to, Pub 969, Health Savings Accounts and Other Tax-Favored Health Plans.

    Note:

    Premiums for Medigap policies are not qualified medical expenses.

  5. Any amount of the distribution not used exclusively for qualified medical expenses of the account beneficiary, spouse or dependents is includible in gross income of the account beneficiary and is subject to an additional tax on the amount includible in income. Refer to table below for the percentage of additional tax.

    Tax Year Additional Tax
    2014 - 2017 20 percent Tax

    Exception:

    Distributions made after the account beneficiary’s death, disability or attaining age 65 are not subject to the additional tax.

  6. Form 8889, Health Savings Accounts (HSAs), Part II, HSA Distributions, is used to compute the taxable amount of the HSA distribution. It is included in the total amount reported on line 21 of the Form 1040, U.S. Individual Income Tax Return. Taxpayers are instructed to enter "HSA" and the amount on the dotted line next to line 21. The additional tax, if applicable, is included in the total amount reported on the Form 1040, line 62. Taxpayers are instructed to enter "HSA" and the amount on the dotted line next to line 62.

  7. If the account beneficiary is no longer an eligible individual (e.g., entitled to Medicare benefits, or no longer exclusively has an HDHP), distributions used exclusively to pay for qualified medical expenses continue to be excludable from the account beneficiary’s gross income.

  8. Upon death, any balance remaining in the account beneficiary’s HSA becomes the property of the individual named in the HSA as the beneficiary of the account.

    • If the account beneficiary is the surviving spouse, the surviving spouse is subject to income tax only to the extent distributions from the HSA are not used for qualified medical expenses.

    • If the account beneficiary is a person other than the surviving spouse, the HSA ceases to be an HSA as of the date of death. The account beneficiary is required to include in their gross income the fair market value of the HSA assets as of the date of death. The includable amount in the account beneficiary’s gross income (except the decedent’s estate) is reduced by any payments from the HSA made for the decedent’s qualified medical expenses, if paid within one year after death.

Achieving a Better Life Experience (ABLE)

  1. The Achieving a Better Life Experience (ABLE) account provision was signed into law in December 2014, recognizing the special financial burdens faced by families raising children with disabilities. ABLE accounts are designed to enable people with disabilities and their families to save for and pay for disability-related expenses. There are two new forms that ABLE account programs will use to report relevant account information annually to designated beneficiaries, Form 1099-QA, Distributions from ABLE Accounts, and Form 5498-QA, ABLE Account Contribution Information.

Who Is Eligible for Achieving a Better Life Experience (ABLE)?
  1. The new law authorizes any state to offer its residents the option of setting up an ABLE account.

  2. The account owner and designated beneficiary of the account is the disabled individual. In general, a designated beneficiary can have only one ABLE account at a time, and must have been disabled before his or her 26th birthday.

  3. For tax years after December 31, 2014, subject to the qualified ABLE programs rules, ABLE accounts may be established in any state. This allows individuals to set up ABLE accounts and choose the state program that best fits their needs (i.e., investment options, fees, and account limits).

Achieving a Better Life Experience (ABLE) Contributions
  1. Contributions totaling up to the annual gift tax exclusion amount, currently $14,000, can be made to an ABLE account each year, and distributions of earnings are tax-free if used to pay qualified disability expenses.

  2. Qualified disability expenses are related to the designated beneficiary’s blindness or disability and help that person maintain or improve health, independence and quality of life. For example, they can include housing, education, transportation, health, prevention and wellness, employment training and support, assistive technology and personal support services and other disability-related expenses.

Form 1099-QA Distributions From ABLE Accounts and Form 5498-QA ABLE Account Contribution Information
  1. The ABLE Act permits a state to establish and maintain a new type of tax-advantaged savings program (under Section 529A of the Internal Revenue Code). Beginning with tax year 2016, processing year 2017, the following two information forms will be used:

    • Form 1099-QA Distributions From ABLE Accounts

    • Form 5498-QA ABLE Account Contribution Information

  2. These information returns can only be filed on paper, as electronic filing is not available for tax year 2016 and forward.

  3. These forms will not be available on CC IRPTR. If the taxpayer has questions concerning the Form 1099-QA or the Form 5498-QA, direct them back to the state where they established their ABLE account. The state where the ABLE account was established issues the forms to the taxpayers. Refer to the Pub 907, Tax Highlights for Persons With Disabilities, for additional information.

Individual Retirement Account File (IRAF) Overview

  1. The Individual Retirement Account File (IRAF) is accessed with MFT 29. When a taxable Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, is processed with an original Form 1040, U.S. Individual Income Tax Return, an Individual Retirement Account File (IRAF) (MFT 29) is established by return information extracted from IMF.

    Exception:

    Form 5329, Part I, Additional Tax on Early Distributions, or Part II, Additional Tax on Certain Distributions From Education ABLE Accounts, post to IMF, MFT 30.

  2. The spouse indicator (1 for the primary taxpayer or 2 for the secondary taxpayer) shows which spouse on a joint return filed the Form 5329. The spousal indicator is displayed on command code (CC) IMFOLR and CC RTVUE.

  3. The type indicator (displayed on CC IMFOLR) is a code edited on Form 5329 or generated by input of TC 971 action code (AC) 144. Refer to IRM 21.6.5.4.11.4, Processing Form 5329 With TC 971 AC 144. It tells the computer whether or not to post Form 1040, U.S. Individual Tax Return, and indicates a dummy or original return. Valid indicators are:

    IRAF Code Explanation of Code
    0 Indicates an original Form 1040 with accompanying IRA data. This code is not used to input a Form 5329.
    1
    1. Indicates Form 5329 was received without Form 1040. This is used by Document Perfection when dummy return is prepared, or

    2. MFT 29 was established from input of TC 971 AC 144. Refer to IRM 21.6.5.4.11.4, Processing Form 5329 With TC 971 AC 144.

    2 Indicates Form 5329 was accompanied by a Form 1040X, Amended U.S. Individual Income Tax Return, an amended Form 1040 or correspondence, and IMF adjustments are completed. This allows Form 5329 to post to IRAF based on input of a dummy Form 1040.
    3 Indicates all necessary adjustments were made to both IMF and IRAF. If transaction code is 977, this type indicator does not issue CP 36, Duplicate Filing Notice, or set a -A freeze.
  4. Effective January 2006, a programming change allows a systemically generated TC 846 on IRAF MFT 29 modules (using the same programming process as MFT 30), providing freeze code conditions that prevent refunds are not present.

  5. The input of a TC 971, AC 144 on an IMF MFT 30 module will generate a corresponding IRAF MFT 29 module. This eliminates the requirement to forward a dummy Form 1040 to processing with Form 5329 to establish an IRAF MFT 29 account. Refer to IRM 21.6.5.4.11.4, Processing Form 5329 With TC 971 AC 144, to establish IRAF MFT 29 accounts for loose Form 5329 or Form 5329 received with amended returns.

Individual Retirement Account File (IRAF) Filing History Codes
  1. The following Individual Retirement Account File (IRAF) Filing History Codes are displayed on IMF entity:

    History Code Explanation of Code
    6 IRAF Notice issued to secondary taxpayer.
    7 IRAF Notice issued to primary and secondary taxpayer.
Individual Retirement Account File (IRAF) Abstract Numbers
  1. Abstract numbers must be used with any Individual Retirement Account File (IRAF) MFT 29 tax adjustment. IRM 21.6.5.4.11.7, Individual Retirement Account File (IRAF) Tax Adjustments, for information on input of adjustments with abstract numbers. Valid item Abstract Numbers are:

    Abstract Number Explanation of Number
    160 Increase or decrease tax on excess contributions. Reported as Additional Tax on Excess Contributions to Traditional IRAs, on the Form 5329.
    162 Increase or decrease in accumulations tax. Reported as Additional Tax on Excess Accumulation in Qualified Retirement Plans (Including IRAs), on the Form 5329.
    233 Increase or decrease tax on Archer Medical Savings Account (MSA) excess contributions. Reported as Additional Tax on Excess Contributions to Archer MSAs, on the Form 5329.
    235 Increase or decrease in tax on Coverdell IRA excess contributions. Reported as Additional Tax on Excess Contributions to Coverdell ESAs, on the Form 5329.
    236 Increase or decrease in tax on Roth IRA excess contributions. Reported as Additional Tax on Excess Contributions to Roth IRAs, on the Form 5329.
    237 Increase or decrease to additional 6 percent tax on excess contributions to HSAs. Reported as Additional Tax on Excess Contributions to Health Savings Accounts (HSAs), on the Form 5329.
    238 Increase or decrease in tax on Achieving a Better Life Experience (ABLE) excess contributions. Reported as Additional Tax on Excess Contributions to an ABLE Account, on the Form 5329.
  2. The TC 29X amount must equal combined Abstract Numbers 160, 162, 233, 235, 236, 237, and 238 amounts.

Individual Retirement Account File (IRAF) Blocking Series and Source Documents
  1. Adjustments to Individual Retirement Account File (IRAF) MFT 29 modules are Non-Source Document (NSD) adjustments. Since all information/forms are scanned into CIS, there is no need for source document adjustments.

  2. Use blocking series (BS) 00 on all IRAF adjustments except in the following specific cases:

    BS Used for
    50 Adjustments created by Revenue Act of 1978 and Public Law 95-458.
    70 Mathematical/clerical errors.
    80 Offers in Compromise.
    96 Penalty Appeals Indicator Set.
    97 Penalty Appeals Indicator Released.

    Note:

    Source codes (SC) and reason codes (RC) cannot post to MFT 29 IRAF accounts. Do not use any SC or RC when adjusting MFT 29 IRAF accounts. For information on hold codes, refer to IRM 21.5.2.4.15, Rules on Hold Codes (HC).

Processing Form 5329 With TC 971 AC 144
  1. Effective January 2006, the input of a TC 971 AC 144 on a MFT 30 module generates a corresponding MFT 29 module for Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts.

    • The TC 971 AC 144 generates an IRAF MFT 29 module with a TC 150 for .00. A TC 971 AC 144 is also generated on the MFT 29 module.

    • The TC 971 date is also the TC 150 date on the MFT 29 module. Applicable penalty and interest generate based on the TC 150 date.

    • IRAF MFT 29 modules generated by the input of TC 971 AC 144 to the corresponding IMF MFT 30 account are identified by the TC 150 DLN. The IRAF MFT 29 TC 150 DLN is the same as the TC 971 AC 144 DLN, except the document code is 11 and the Julian date is always 886.

    • The type indicator and the IRAF Spousal Indicator (if applicable) generate and post to CC IMFOLR.

    • Normal tax liability offsets occur.

  2. Installment Agreements (IA) and Direct Debit Installment Agreements are permitted on MFT 29 modules.

  3. Systemically generated refunds, TC 846, occur on MFT 29 modules using the same programming process as MFT 30 systemic refunds.

  4. If a Form 1040X, Amended U.S. Individual Income Tax Return, is received and the additional tax is for the Form 5329, but no Form 5329 is attached, correspond with the taxpayer either by phone or letter requesting the Form 5329.

    • If a response is received, follow the procedures below to establish the MFT 29 module and assess the tax.

    • If no response is received, prepare a dummy 5329 and edit the amount from the Form 1040X to the dummy Form 5329. Follow the procedures below to establish the MFT 29 module and assess the tax. Input the adjustment to reflect the primary taxpayer if a determination cannot be made.

  5. The following conditions require establishing an MFT 29 module if one does not currently exist:

    • A Form 5329, with entries in Parts III - IX, received with Form 1040X or amending an originally filed Form 1040.

    • A loose Form 5329, with entries in Parts III - IX, received without a Form 1040 filing (taxpayer is not liable for filing Form 1040. This includes statute years.)

      Note:

      Do not push code loose Forms 5329. TC 930 is not valid for IRAF MFT 29 modules. Establish the IRAF MFT 29 module following the procedures below.

  6. Follow these procedures to establish an MFT 29 module with the input of a TC 971 AC 144 on a MFT 30 account:

    1. Determine if there is an entity on IMF. If none exists, establish an entity by inputting a TC 000 on CC ENMOD. Monitor for posting of the entity; once posted follow procedures below.

      Note:

      If multiple Forms 5329 are received, establish the entity by inputting TC 000 on CC ENMOD, using the tax period for the earliest Form 5329 received.

    2. On the IMF MFT 30 account, input a TC 971 AC 144 for the tax period as shown on Form 5329. A TC 971 AC 144 cannot be input to MFT 29. It will generate on the MFT 29 account when input to the corresponding MFT 30 tax year.

    3. When inputting TC 971 AC 144 to the IMF MFT 30 account include the cross reference (XREF) Social Security number (SSN) (as shown on Form 5329). The XREF MFT 29 tax period will generate (the same tax period as the MFT 30). It is possible to input two TC 971 AC 144 transactions on the same MFT 30 module (one for the primary SSN and one for the secondary SSN).

      Exception:

      If the Form 5329 is for the secondary SSN on a joint return, compare the Form 5329 name control with CC INOLES IMF name control. If the name control does not match, to avoid unpostable code 169-9, follow procedures in (d) below.

    4. If Form 5329 is for the secondary SSN, compare the Form 5329 name control with CC INOLES IMF name control. If the name control does not match CC INOLES input a TC 971 AC 144 on MFT 30 for the secondary SSN, for the same tax period as shown on Form 5329. Do not input TC 971 AC 144 to the MFT 30 for the primary SSN. Continue with procedures in (e) - (j) below.

      Note:

      For these types of cases, it may be necessary to establish an entity on CC ENMOD with TC 000 for the name as shown on Form 5329 (if the IMF name control is a mismatch and an IMF entity with this name control is not present). This will allow an MFT 29 module to generate with the name control as shown on Form 5329.

    5. The received date is required input for TC 971 AC 144. Use the Form 5329 received date for input of the TC 971 transaction date. This posts on the MFT 29 module as the TC 150 .00 date and establishes the Form 5329 ASED.

      Note:

      If a Form 5329 is received without the original Form 1040, the ASED begins with the posting of the MFT 29 TC 150 date. The ASED is the due date of the return or the date of filing (received date), whichever is later. If Form 1040 and Form 5329 are received and processed at the same time, the MFT 29 and MFT 30 ASED are the same.

    6. Input the TC 290 amount on IRAF, MFT 29, for the taxpayer indicated on the Form 5329. Include the corresponding IRAF abstract codes, and use hold code 3, for the taxpayer on the Form 5329. Refer to IRM 21.6.5.4.11.2, Individual Retirement Account File (IRAF) Abstract Numbers, for a list of related codes.

    7. Input a posting delay code for 3 cycles. This allows the MFT 29 module to generate from the input of the TC 971 AC 144 on the MFT 30 module. The MFT 29 module will post with a TC 150 .00 and TC 971 AC 144.

    8. If a subsequent adjustment is needed to abate tax (usually from a waiver request for excess accumulations tax), input TC 291 amount on IRAF, and hold code 3, MFT 29 with the corresponding IRAF abstract codes. Input posting delay code for 4 cycles. Refer to IRM 21.6.5.4.5, Excess Accumulations, for information regarding this type of excise tax.

      Note:

      In 2006, the instruction to include payment for the excise tax on excess accumulations, when submitting a waiver, was deleted from the Pub 590-A, Contributions to Individual Retirement Arrangements (IRAs), and Pub 590-B, Distributions from Individual Retirement Arrangements (IRAs).

    9. SCs and RCs cannot post to MFT 29 modules. Do not input SCs or RCs on MFT 29 adjustments. For information on hold codes, refer to IRM 21.5.2.4.15, Rules on Hold Codes (HC).

    10. Send appropriate letter to the taxpayer and explain the actions taken.

  7. Use extreme caution when inputting these transactions. The MFT 29 module (with a TC 150) may have been established based on previous input of a dummy Form 1040 with a Form 5329 sent through processing. A subsequent TC 290 and IRAF abstract codes (based on input of TC 971 AC 144) will also post. This would create a duplicate assessment.

Individual Retirement Account File (IRAF) Entity
  1. An Individual Retirement Account File (IRAF) adjustment or credit transfer will not post unless an entity is established on the IRAF for a particular module.

  2. An IRAF entity is established when a Form 5329 posts as a TC 150 and is updated when a later return posts.

    • The name line from Form 5329 is transcribed.

    • All other entity data is extracted from the IMF.

IMF Tax Adjustments
  1. The additional 10 percent tax is adjusted on the IMF account for:

    • Form 5329, Part I, Additional Tax on Early Distribution.

    • Form 5329, Part II, Additional Tax on Certain Distributions From Education Accounts and ABLE Accounts.

  2. No adjustment is made to the IRAF (MFT 29) account.

  3. Determine if the 10 percent tax was included in the posted IMF (MFT 30) tax.

  4. If a loose Form 5329 with Part I or Part II completed is received, research the account (both accounts for MFJ taxpayers) to determine if the income and tax were reported on the return. If no return on file, contact the taxpayer and advise them that a Form 1040 is required to be filed with the Form 5329. If the income and tax are reported on the return, then determine if an adjustment is needed.

  5. If the income on the Form 5329, Parts I or II was included as income on the tax return, make the adjustment to include the 10 percent tax.

  6. Consider changes to income tax and/or the 10 percent tax.

  7. Determine if an IMF tax adjustment is needed.

    If Then
    No adjustment is necessary Input TC 290 .00 on the IMF (MFT 30) account.
    An adjustment is necessary
    1. Input TC 29X on the IMF account using reason code (RC) 048, the appropriate blocking series and source code (SC).

    2. Attach source documents (e.g., Form 1040X, original Form 5329, taxpayer correspondence, etc.) behind the IMF adjustment document.

Individual Retirement Account File (IRAF) Tax Adjustments
  1. The additional tax (excise tax) on excess contributions to Traditional IRAs, Roth IRAs, Coverdell ESAs, Archer MSAs, HSAs, and ABLE Account from Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts are adjusted on the IRAF, MFT 29.

    Note:

    The part-numbers on the Form 5329 may vary depending on the tax year.

  2. The additional tax on excess accumulation in qualified retirement plans (including IRAs) from Form 5329, Part IX, is adjusted on the IRAF, MFT 29.

    • Ensure an entity for the particular module is present or established prior to taking any adjustment action.

    • Verify that the impact on both the IMF (MFT 30) and IRAF (MFT 29) modules was considered.

    • Use TC 29X with appropriate item abstract number to adjust an established module on IRAF MFT 29. Refer to IRM 21.6.5.4.11.2, Individual Retirement Account File (IRAF) Abstract Numbers, for definitions of the abstract numbers.

    • The TC 29X amount must equal combined Abstract Numbers 160, 162, 233, 235, 236, 237, and 238 amounts.

  3. For the blocking series, refer to IRM 21.6.5.4.11.3, Individual Retirement Account File (IRAF) Blocking Series and Source Documents.

  4. SCs and RCs cannot post to MFT 29 IRAF accounts. Do not use any SCs or RCs when adjusting MFT 29 IRAF accounts. For information on hold codes, refer to IRM 21.5.2.4.15, Rules on Hold Codes (HC).

  5. Do not enter a correspondence date when adjusting MFT 29 accounts.

  6. Transfer any remittance for IRAF using CC ADD/ADC 24. Refer to IRAF credit transfers in IRM 21.6.5.4.11.8, Individual Retirement Account File (IRAF) Credit Transfers.

Individual Retirement Account File (IRAF) Credit Transfers
  1. Transfer any additional credit using CC ADD/ADC24.

    If Then
    Assessing tax on IRAF (MFT 29) and the credit is available on IMF (MFT 30)
    1. Use CC ADD/ADC24 to transfer the credit to the IRAF module.

    2. Use TC 820 to debit IMF and TC 700 to credit IRAF.

    The actual IRAF payment or portion of the IRAF payment posted to IMF Use appropriate transaction codes to debit IMF and credit IRAF.
  2. Effective in January 2006, overpayments refund from IRAF (MFT 29) accounts. A TC 846 will systemically generate and post to IRAF (MFT 29) modules, providing freeze code conditions preventing a refund are not present. Offsets to any outstanding liabilities also apply to IRAF. Take the following action to transfer a payment from IRAF to IMF when applicable:

    If And Then
    The credit was created by a TC 896/796 offset The amount is available for application to IMF (MFT 30)
    1. Reverse the offset using CC ADD/ADC24.

    2. Use TC 792 to debit the IRAF (MFT 29) and TC 892 to credit IMF.

    3. Include spouse indicators

      • "0" for non-joint filer

      • "1" for primary taxpayer

      • "2" for secondary taxpayer

      on the CC DRT24 format. Use the spousal indicator as posted on RTVUE (use definer RY to view one posted Form 5329 or RZ to view two Forms 5329 information) to avoid an unpostable condition.

    The credit was created by a payment posting to IRAF in error The amount is available for application to IMF Use appropriate transaction codes to debit IRAF and credit IMF.
  3. Send the appropriate letter to the taxpayer to explain the actions taken.

  4. If the credit was applied to the Unidentified or Excess Collection file, prepare documentation to move the payment to the IRAF account. Refer to IRM 21.5.7.3.6, Research Unidentified Remittances and Excess Collection File, for more information.

Internal Individual Retirement Account File (IRAF Notices)
  1. Internal IRAF Notices generate to notify the campus that additional action or review of the IRAF module (MFT 29) may be necessary.

IRAFASSESS Transcripts
  1. An internal IRAFASSESS transcript generates on Control D to notify the campus that a manual review of the excess accumulation tax reported on Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, Part IX, Additional Tax on Excess Accumulation in Qualified Retirement Plans (Including IRAs), is needed.

  2. Taxpayers may request a waiver of the 50 percent excise tax by attaching an explanation that the excess accumulation was due to a reasonable error and reasonable steps were taken to remedy the situation.

    Note:

    Refer to Pub 590-A, Contributions to Individual Retirement Arrangements (IRAs), and Pub 590-B, Distributions from Individual Retirement Arrangements (IRAs), for additional information on waiver requests.

  3. An IRA Condition Code 35 indicates a waiver request of tax on excess accumulations on a qualified retirement plan is present. If the IRA condition code 35 is present, the waiver request must be reviewed to determine whether a waiver can be granted.

  4. IRA Condition Code 35 is visible on CC RTVUE, with definer RY or RZ (indicating two Forms 5329 are present). IRA Condition Code 35 is converted to Computer Condition Code (CCC) X and is visible on the MFT 29 account on CC IMFOLR.

  5. If the return was filed by paper, request the return from Files to review the waiver request attached to the return. If filed electronically, review Modernized e-File (MeF) Return Request Display (RRD) for the waiver explanation.

  6. If the explanation indicates the excess accumulation was due to a reasonable error and reasonable steps were taken to remedy the situation, the excess tax should be waived. Use the following procedures after reviewing the excess accumulation tax and waiver request:

    If Then
    An adjustment is necessary
    1. Use CC REQ54 to adjust IRAF, MFT 29 account.

    2. Use the appropriate abstract number. For a list of abstract numbers refer to IRM 21.6.5.4.11.2, Individual Retirement Account File (IRAF) Abstract Numbers.

    3. If the excise tax is waived, refund applicable payments.

    4. The refund will generate from the MFT 29. Do not move the payments back to the MFT 30 to refund.

    No adjustment is necessary
    1. Notate on CIS why the waiver is not being granted.

    2. Send the taxpayer a letter explaining why the waiver was not granted.

    3. Refile any paper Forms 1040.