If the business or individual return is suddenly subjected to a random tax audit enquiry, you will be responsible for the professional fees of the accountant who will respond to the investigation. Professional fees can be considerable if you do not have the protection of tax audit insurance that is available to accountants and their clients.
Stiff penalties apply to individuals who have overstuffed their Individual Retirement Account. According to the Treasury Inspector General for Tax Administrator, 401(k) workplace retirement plans are being pushed to the limits by savers to save more than what is allowed. This will result to significant cost to the Treasury Department.
According to recommendations of TIGTA, lax employers and errant employees must comply with the 401(k) contribution limits otherwise they may be targeted for audits. Majority of taxpayers comply with 401(k) contribution limits but there are employers who do not have controls in preventing their employees from exceeding the annual limits. Some employees make the mistake of contributing to multiple 401(k) plans. There are mostly repeat offenders who have made excessive contributions for 3 years in a row.
Based on TIGTA estimates, if 1,400 taxpayers have gone over the limits of their 401(k) contributions, they would owe additional taxes amounting to almost $8 million if non-compliant. If 13,200 taxpayers have contributed to multiple 401(k) plans and have exceeded the limits, the taxes they owe amounts to about $33 million. However, it should be noted that almost $255 billion were contributed by 53 million taxpayers in 2014 to workplace retirement plans that includes 401(k).
In 2014, the contribution limits for 401(k) were $17,500 plus an additional $5,500 that is allowed as catch-up contributions for workers who are 50 and above. Any amount that is more than the tax year limit is called excess contribution that can be withdrawn as excess by April of the following year and reported as income for the year it was contributed.
Mistakes in business or individual tax returns may result onto a tax audit inquiry. An accountant has to respond to the audit and present supporting documents. Thousands of dollars can be incurred in professional fees. The best option is tax audit insurance to have the peace of mind that the professional fees will be covered.