Early Distributions From Retirement PlansWritten by Richard A. Chapo
An early distribution from an Individual Retirement Arrangement (IRA) or a qualified retirement plan need not be a “taxing” experience. Fortunately, there are exceptions to early distributions.
Any payment that you receive from your IRA or qualified retirement plan before you reach age 59½ is normally called an “early” or “premature” distribution. As such, these funds are subject to an additional 10 percent tax. But there are a number of exceptions to age 59½ rule that you should investigate if you make such a withdrawal. Some of these exceptions apply only to IRAs, some only to qualified retirement plans, and some to both. IRS Publications 575, Pensions and Annuities, and 590, Individual Retirement Arrangements (IRAs), have details.
In addition to 10 percent tax on early distributions, you will add to your regular taxable income any distributions attributable to “elective deferrals” that you contributed from your pay, your employer’s contribution and any income earned on all contributions to account. If you made any nondeductible contributions, their portion of distribution is not taxed, since you’ve already paid tax on this amount.
There is a way to avoid paying any tax on early distributions, however. It is called a “rollover.” Generally, a rollover is a tax-free transfer of cash or other assets from an IRA or qualified retirement plan to an eligible retirement plan. An eligible retirement plan is a traditional IRA, a qualified retirement plan, or a qualified annuity plan. You must complete rollover within 60 days of when you received distribution. The amount you roll over is generally taxed when new plan pays you or your beneficiary.
IRS Obtains More Than 100 Injunctions Against Tax Scheme PromotersWritten by Richard A. Chapo
The IRS announced today that it has obtained civil injunctions against more than 100 promoters of illegal tax avoidance schemes and fraudulent return preparers in an ongoing crackdown that began in 2001. Many of injunctions, obtained in cooperation with Department of Justice, also order promoters to turn over client lists and to cease preparing federal income tax returns for others.
Signaling a renewed fight against tax fraud, federal government stepped up use of civil power four years ago. Civil injunctions have subsequently been used to stop:
1. Abusive trusts that shift assets out of a taxpayer’s name but retain that taxpayer’s control over assets. 2. The misuse of “Corporation sole” laws to establish phony religious organizations. 3. Frivolous “Section 861” arguments used to evade employment taxes. 4. Claims of personal housing and living expenses as business deductions. 5. "Zero income” tax returns. 6. Abuse of Disabled Access Credit. 7. The claim that only foreign-source income is taxable.
The IRS identifies abusive tax promoters through a variety of means, including ongoing examinations, Internet and media research or referrals from external sources such as tax professionals. If findings of an investigation support a civil injunction, IRS refers case to Department of Justice.