Common Compliance Problems



By Tammy Shultz, CISP, CHSP, QPA

When reviewing an IRA owner’s file, we discovered that it contained no opening documents nor evidence of her having received the opening documents. How do we fix this compliance concern?

Financial organizations must provide certain documentation to clients who establish IRAs. Three categories of opening documents are associated with IRAs: the plan agreement,
disclosure statement, and financial disclosure. Each document plays an important role in ensuring that IRAs are established and maintained in accordance with federal rules and regulations. Failure to maintain proof that IRA owners have received these documents could subject the financial organization to substantial IRS penalties.

If you have found IRA files with missing or no opening documents, you should consider using one of the following remedies.

  • Ask the IRA owner if he has the signed, original documents, and make copies for your files.

  • Ask the individual to sign new documents to legitimize the IRA from this point forward.

  • If there are any extenuating circumstances that may account for the loss of the documents (e.g., a merger of acquisition), consider keeping a note in the file detailing the circumstances.

Our internal IRA compliance officer found that some of our reporting that was sent to the IRS is not accurate. How do we fix incorrect reporting?

Reporting is the closest contact most financial organizations will have with the IRS. The IRS computer systems can match the various reporting forms received from IRA owners, businesses, and financial organizations to determine the accuracy of reporting. Any discrepancies could create a red flag, indicating to the IRS that the particular transaction should be examined in more detail. Accordingly, you must be aware of and properly implement accurate reporting procedures, including how to correct your reports.

IRS Publication 1220, Specifications for Electronic Filing of Forms 1097, 1098, 1099, 3921, 3922, 5498, and W-2G, contains instructions on how to file corrections electronically. These correction procedures for paper forms are contained in the General Instructions for Certain Information Returns.

We have several clients that take scheduled payments. We’ve never sent these clients a withholding notice or election. How can we fix this?

Financial organizations must notify distribution recipients of their right to make, renew, or revoke their withholding elections. Failure to give proper notice to recipients may subject a financial organization to penalties for each failure.

For distributions taken less frequently than quarterly, the financial organization must provide a withholding notice before each distribution, but no more than six months preceding a distribution. If distributions are scheduled quarterly or more frequently, the financial organization need only provide a withholding notice once per year at a reasonable time before the first payment each year. Once the distribution recipient makes a withholding election, it is valid until revoked. A recipient may revoke an election at any time by signing another Form W-4P, Withholding Certificate for Pensions or Annuity Payments.

There is no remedial action available if withholding notices and elections are not properly provided. So you should create procedures to mail withholding notices to those individuals receiving scheduled payments. By mailing semi-annual notices, all of the distribution frequencies will be covered.

You should also establish a master file documenting each withholding notice mailing. The file should contain a dated copy of the notice and a list (paper or electronic) of the IRA owners who received the notice.