IRA Reporting: How to Deal with the Next Major Challenge for Tax Reporting Professionals

Staying compliant with IRA reporting has become a major challenge for institutions, with baby boomers retiring at a rapid rate and employees of all ages saving for retirement.


IRA reporting is both massive in scope and deeply complex, carrying with it daily reporting and withholding requirements, and encompassing an intimidating number of federal and state jurisdictions.


As is the case with other facets of 1099 reporting, IRA reporting deadlines are tightening every year, and many institutions are struggling to keep up with both the volume and the pace of reporting requirements.


For the most part, institutions that have successfully navigated IRA reporting have done so by centralizing and automating reporting processes. Those that don’t plan to centralize and automate risk financial penalties, cost overruns and other negative consequences.   


Complications of an Aging Population

The nightmare scenario demographers have predicted for decades has arrived. An aging population moving rapidly toward retirement in large numbers is complicating the already difficult task of staying compliant with IRA reporting.


Baby boomers, the generation now hitting retirement, represent a massive demographic born roughly between the mid-1940s and 1965, now aged about from their mid-50s through their mid-70s. On average, 10,000 boomers retire every day, and expert predictions have that trend continuing through about 2030. By then, the Pew Research Center predicts, 18 percent of the population will be 65 or older.


Further complicating the reporting picture is the popularity of IRAs, which, for reporting purposes, include traditional, Roth and employee-sponsored plans. As of 2016, more than one-third of US households owned at least one type of IRA, and as of Q1 2017, IRA assets totaled about $8.2 trillion. 


Increasing Reporting Responsibilities

What those numbers mean for institutions is a sustained increase in forms to be sent to employees and reported to the IRS. And that means more resources dedicated to IRA reporting and related compliance efforts.


The two main forms for IRA reporting are Form 1099-R and Form 5498. Institutions must file a Form 1099-R for each person who received a distribution of $10 or more from programs such as profit-sharing or retirement plans, IRAs, annuities, pensions, insurance contracts and survivor income benefit plans. Institutions must report IRA contributions on Form 5498 for each person for whom the institution maintained an IRA, including institution-sponsored SEP or SIMPLE IRAs.


After a tax year has concluded, 1099-Rs are due to recipients by January 31, and Form 5498s are due to participants by January 31 or May 31. January 31 is the due date for fair market value (FMV) and required minimum distributions (RMD) reporting, while May 31 is the due date for reporting contributions.  


But there is more to IRA reporting than just those forms and deadlines. IRA reporting is, in fact, a year-round process. Throughout the tax year, there is quarterly state reporting as well as a requirement to report and deposit withholding tax to state agencies and the IRS on a quarterly, monthly, weekly and even daily basis. This process requires institutions to use a large number of resources throughout the year to track transactions and make sure tax liabilities are reported to multiple government agencies in a timely manner.


Complexity and Financial Penalties

IRA is a highly complex process. Most of the complexity stems from Form 1099-R. First, there are 18 different distribution codes to manage; every single code combination must be correct for each situation. 


There are codes for early distributions, exceptions, deaths, and rollovers, to name a few. For example, if a recipient rolls over a 401(k) directly to an IRA, the 1099-R should show code G in box 7 to indicate that none of the distribution was taxable. Alternatively, if a recipient takes a distribution from a traditional IRA before the age 59 1/2 and no exceptions apply, code 1 belongs in box 7.


Beyond that, there is withholding tax reporting that must take place throughout the year. There are more than 40 state jurisdictions with differing guidelines and 200 different payment days for a given tax year. Staying compliant with all of them requires a large amount of internal resources to ensure each payment amount is calculated correctly and reconciles with the general ledger, all while keeping due dates and payment threshold rules in mind. 


Annual reconciliations require a very manual process, as many states are behind on their technology with no expected improvements in sight for most. Additionally, a handful of states still require annual reconciliations to be done on paper and mailed or faxed to the respective agency.


Piling on top of all this is the IRS payment and filing requirements that require meticulous data governance for institutions to avoid being assessed penalties and interest. 


And the penalties can be severe. For example, if an institution accumulates $100,000 or more in federal taxes on any day during a monthly or semiweekly period, the total amount must be deposited by the next business day.


This means that if there is more than $100,000 withheld on a single period, the IRS needs that money in its bank account the next day following the transaction report date—and not just a payment initialized the next day. Penalties will accumulate immediately with a 2 percent penalty applied if the institution makes a deposit 1 to 5 days late. That’s a quick $2,000 minimum penalty for not having proper, compliant procedures in place.


Encroaching Deadlines

As if complexity weren’t enough of a headache, the time allotted to institutions for reporting is shrinking. The Protecting Americans from Tax Hikes Act, or PATH Act, passed in 2015, moved the deadline for sending Form W-2 and Form 1099-MISC (if box 7 is populated) to the IRS up by two months, to January 31.


In the wake of the PATH Act, states responded by not only moving up their reporting deadlines for W2 and 1099-MISC but also moving up deadlines for other 1099 forms. As of 2016, 40 of the 42 states with income tax withholding require 1099-R information to be sent to them. Iowa will require submission of 1099s starting with tax year 2017, with a deadline of January 31, 2018. Additionally, California and Maine require information to be sent on a quarterly basis.


With this new deadline, institutions have less time to verify employee information and make necessary adjustments, placing an increased emphasis on accuracy. Add to all of this increased penalties for late filing, and the risk of exposure to negative consequences continues to quickly expand. 


Rethinking Compliance Processes

Failure to comply with IRA reporting can lead not only to financial penalties but also to a damaged reputation and a drop in customer satisfaction, and ultimately to a loss of customers and revenue. And even institutions that manage to remain compliant often do so at the expense of shifting staff away from critical business functions to focus on compliance efforts.


With deadlines moving up and penalties increasing, the risk of trying to handle IRA reporting manually or through disparate departments or geographies is too severe to accept. Institutions need to rethink IRA reporting the way they should currently be rethinking all 10-series reporting, by focusing on centralization and automation.


Establishing center of excellence in tax information reporting actually reduces the number of resources necessary to stay compliant with IRA reporting. It places responsibility for compliance in the hands of a select group rather than distributing it among employees from different departments and geographies who are responsible for different functions. It also allows non-tax employees to fully focus on their primary roles and maximize efficiency.


Ultimately, a center of excellence decreases the cost of compliance by reigning costs in to just one accountable group. And, when combined with automation, centralizing tax operations enables institutions to eliminate errors and confusion in the reporting process, thereby greatly reducing the risk of negative consequences such as financial penalties or disgruntled customers.


Automation goes hand-in-hand with centralization. Tighter deadlines and the surge in IRA reporting volume are rendering manual reporting processes too cumbersome to sustain. Institutions need, for instance, to make sure their information is accurate before sending it to recipients or the IRS in order to avoid penalties. Automation enables them to do that.


Another advantage of automation is simply the speed at which institutions can handle processing forms. Manual processes are too slow for tightening deadlines, and building reporting systems internally is an extremely expensive and time-consuming process that requires an inordinate amount of technical expertise.


Third-party automation offers built-in risk aversion without the resource-intensive chore of having to build a reporting system in-house. With IRA reporting requirements already proving cumbersome, institutions need to focus their resources on staying in compliance now rather than trying to build, test and rebuild systems of their own.


The Sovos Solution

Sovos enables institutions to centralize and automate their IRA reporting processes. As the largest 10-series filer in the United States, Sovos serves nearly half of the Fortune 500 across 52 different industries for IRA reporting. With a strong presence in serving financial institutions and insurance companies, Sovos has a proven track record of handling the burdens and risks of compliance in IRA reporting.


As the volume and pace of IRA reporting continues to increase, Sovos provides solutions that enable institutions to lower cost, maximize efficiency and avert risk. Sovos offers cloud-based, hybrid and on-premises solutions that enable employees to eliminate filing errors by providing functionality such as name-TIN (tax identification number) matching.


With automated solutions from Sovos, institutions can carry out IRA reporting in centralized reporting units efficiently, allowing non-tax employees to continue to focus on business-critical roles.


Take Action

Discover how Sovos enables IRA reporting with 1099 reporting solutions.


Contact Sovos to learn more about automating IRA reporting.



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