IRS Needs To Curb Excessive Deductions for Self-Employment Retirement Plans

GGD-82-85: Published: Aug 26, 1982. Publicly Released: Aug 26, 1982.

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GAO reported on the deductions which self-employed individuals have been allowed, since 1962, to contribute to retirement plans authorized by Congress, known as "Keogh plans." Because the legal requirements associated with these plans are complex, there is considerable potential for error in computing allowable deductions.

GAO found that the results of the Internal Revenue Service's (IRS) 1976 Taxpayer Compliance Measurement Program and its own review both show that many taxpayers who claim Keogh deductions do not fully understand the rules applicable to such deductions. IRS estimated that excessive Keogh deductions for tax year 1976 totaled $34 million. Analyses of 1977 tax returns indicated that excessive Keogh deductions may have totaled $114 million for that year. GAO found that neither the Form 1040 instructions nor the various IRS publications present the specific tax rules in a clear and useful way. GAO also found that, in addition to the problem of excessive taxpayer deductions, many taxpayers neglect to file for deductions which they qualify for.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: The Commissioner of Internal Revenue, to help alleviate the problem of excessive Keogh deductions, should provide taxpayers with some basic guidance on Keogh deductions in the Form 1040 instructions and Publications 17 and 334. At a minimum, the guidance should specify that taxpayers should be self-employed to be eligible for such deductions. It should also specify that different rules govern defined benefit and defined contribution plans. Further, the guidance should specify, with respect to defined contribution plans, that an individual must have net profits from self-employment to be eligible for a deduction and that the deduction cannot exceed certain percentage and dollar limits. Also, the Commissioner may want to consider developing a worksheet for use by taxpayers in computing Keogh deductions. The worksheet could be included in Publications 17, 334, and/or 560.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  2. Status: Closed - Implemented

    Comments: The IRS Counsel has determined that the error correction program cannot be used to disallow excessive KEOGH deductions. IRS has established alternative procedures for testing and recovering excessive deductions and verifying contributions claimed, which should accomplish the intent of the recommendation.

    Recommendation: The Commissioner of Internal Revenue, to help alleviate the problem of excessive Keogh deductions, should develop and implement a service center error correction program for excessive Keogh deductions. In so doing, the Commissioner may wish to revise the Form 1040 to require taxpayers to specify whether they contribute to defined contribution or defined benefit plans.

    Agency Affected: Department of the Treasury: Internal Revenue Service

 

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