Retirement Accounts Not Rolled Over Properly - IRS Audits

John Smith | Sep 19, 2011 |

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Retirement Accounts Not Rolled Over Properly - IRS Audits

Retirement accounts not rolled over properly may end up earning you IRS audits. The IRS audit is a process the IRS uses to uncover all of yoru financial data for any given year. They comb through your financial staements and accounting books, checking over each and every deduction you've taken for the year. When your retirement accounts are not rolled over properly, but you took the deduction normally taken on a rollover, you may end up paying a very stiff penalty and be forced to return all of the money you received back from the IRS.

Retirement Accounts

The IRS provides a tax shelter for you on all money you deposit into a retirement account. One such retirement account is called an Individual Retirement Account (IRA), although rollovers can be done from employer-based retirement plans too, like 401(k) plans. This tax shelter exists so long as you keep the money in the account. However, the IRS provides certain exceptions to this rule.

You may transfer the money from one account to another using an indirect rollover. This process entails you closing your account, moving the money to another IRA, and resuming contribution and investment activities.

There are a few important rules you have to obey.

Retirement Accounts Not Rolled Over Properly & IRS Audits

You face an audit when you do not roll over your IRA within a 60 day time frame. You must get a transfer request form from your IRA custodian (the bank or insurance company holding your money). Then you must fill out this form, indicating the amount of money you wish to transfer. Finally, you must indicate the account you are transferring from and the account you wish to transfer to and then sign the form. Turn the form in to your current custodian.

Your custodian will close your IRA and send you a check for 80 percent of the account balance. The remaining 20 percent is sent to the IRS for taxes. You must come up with the missing 20 percent out of your own pocket. Don't worry, you can file for a refund of the 20 percent sent to the IRS when you do your taxes.

However, you must deposit the 80 percent, plus your 20 percent into your new IRA within 60 days. The clock starts ticking as soon as your old account is closed so you must move quickly.

If you fail to perform the rollover, the IRS considers this a failed rollover. More specifically, they treat it like a withdrawal. You're taxed at ordinary income tax rates on all of the money distributed from the IRA. You're also subject to an IRS penalty of 10 percent if you're under age 59 1/2. Ouch. If you try to file for a refund of the 20 percent when you've failed to perform the rollover properly, the IRS may audit you. Double ouch.

You should avoid having your retirement accounts not rolled over properly. IRS audits are costly, in two ways. Not only will you end up giving back the money you took as an illegal deduction, you'll lose all of the time you spend with the IRS while they perform the audit. Your business may even be shut down for several days while the audit is being performed.