Improvements Have Been Made, but Controls Need to Be Strengthened to Detect Improper Self-Employed Retirement Deductions

The Commissioner, Wage and Investment (W&I) Division, should revise procedures for determining eligibility for the self-employed retirement deduction to include Schedule SE as evidence of self-employment.

The Commissioner, Small Business/Self-Employed (SB/SE) Division, should consider for examination the 16 tax returns with retirement contribution deductions over $400,000 for which TIGTA identified only an associated Defined Contribution Plan.

The Commissioner, Small Business/Self-Employed (SB/SE) Division, should work with the Commissioner, Wage and Investment (W&I) Division, to evaluate the benefits of updating Form 1040, Schedule 1, and creating error resolution codes to identify and potentially prevent self-employed retirement deductions that are over the maximumamounts permitted by law or when taxpayers do not report self employed net earnings. For example, Form 1040, Schedule 1, could be updated to include check boxes indicating the type of self-employed retirement plan for which taxpayers areclaiming the deduction and a location to enter the EIN of the self-employed retirement plan. If it is determined to be beneficial, the Commissioner, SB/SE Division, should work with the Commissioner, W&I Division, to update Form 1040, Schedule 1, and create error resolution codes.

The Commissioner, Small Business/Self-Employed (SB/SE) Division, should work with the Commissioner, Wage and Investment (W&I) Division, to assess the cost effectiveness of expanding third-party information reporting currently required for SEPs, SIMPLEs, and other IRAs to other types of retirement plans that currently have no third-party information reporting requirement. If determined to be cost effective,work with the Department of the Treasury to recommend necessary legislative changes.

The Commissioner, Small Business/Self-Employed (SB/SE) Division, should work with the Commissioner, Wage and Investment (W&I) Division, to update the instructions for Form 5498 to report contributions made for self employed retirement plans up until the due date of the tax return, as required for other types of retirement plans.