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Self-employed retirement deductions may face additional scrutiny

On Behalf of | Dec 15, 2020 | Tax Controversies |

A new report from the Treasury Inspector General for Tax Administration (TIGTA) makes several recommendations to the IRS on how it could reduce improper retirement deductions by self-employed individuals. The report suggests that some self-employed people may claim more than is allowed or even claim fraudulent deductions. Or, people may claim these deductions even though there is no evidence they are actually self-employed.

TIGTA notes that the IRS has already made improvements in obtaining compliance with self-employed retirement deductions. In 2014, the watchdog found that 2% of 2011 tax returns claiming a self-employed retirement deduction offered no evidence of self-employment. The new report found that, for the 2017 tax year, those returns claiming the deduction but offering no evidence of self-employment tallied less than 1/2 of 1%. That’s an 84% improvement.

TIGTA also found 42,991 tax returns claimed self-employment retirement deductions that were potentially over the permitted amount. And, 485 tax returns claimed deductions for a simplified employee pension plan contribution despite reporting no net earnings from self-employment. Combined, the potentially improper deductions cost the IRS approximately $178 million.

TIGTA made several recommendations in its report for how the IRS could drive up compliance further:

  • Adding Schedule SE (Self-Employment Tax) to its processing controls
  • Enhancing its controls to determine the reasonableness of self-employed retirement deductions
  • Assessing the need for third-party data to verify these deductions
  • Changing the instructions on Form 5498 for consistency

TIGTA argued that taking these and other steps would not only improve tax compliance but also potentially increase tax revenue by $890 million in five years.

The IRS accepted some of the recommendations and declined others, stating that “due to current budget and staffing limitations, we must make difficult decisions regarding priorities and the types of enforcement actions we pursue and the service we provide.”

How confident are you that you haven’t claimed too much in self-employment retirement deductions? If you are contacted by the IRS, you may wish to bring in a tax attorney to protect your rights and make sure the IRS sees your deductions as proper or mistaken rather than fraudulent.