Tips to Help You Avoid IRA Compliance Blunders

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IRA compliance is a big responsibility for financial organizations that administer IRAs, and mistakes do happen. Staff changes increase as Baby Boomers retire—gone are the days of a dedicated IRA specialist running the IRA program at each organization. New staff must learn not only the day-to-day IRA operations, but the IRA rules. Add to this, the frequently changing rules and the ever-present possibility of IRS audits, and it’s no wonder IRA compliance mistakes happen. These blunders can be costly.

Ascensus® consultants conduct compliance reviews of IRA programs across the country to help financial organizations reduce the potential for errors. Ascensus' Tammy Schultz recently discussed Common Compliance Problems in Ask an Expert. Here are more common errors these consultants have found.

Plan Documents

Compliance begins the moment an IRA is established. The IRS requires that financial organizations provide a plan agreement, disclosure statement, and financial disclosure to IRA owners when they open an IRA. Many financial organizations do not have proof that they provided these opening documents to their IRA clients. Without copies of the signed documents or signed acknowledgements, financial organizations could face a penalty of $50 for each failure.

IRA plan agreements and disclosure statements must be amended from time to time. Financial organizations often fail to provide IRA owners with updated, amended plan agreements and disclosure statements when required—usually when new laws or regulations affecting IRAs are enacted. This oversight also can cost a financial organization $50 for each failure.

A $50 penalty may not seem like much, but if a financial organization administers 1,000 IRAs and, for example, fails to provide both plan agreement and disclosure statement amendments, it potentially could be $100,000 in penalties.


Another common problem area with IRA compliance is reporting—a big concern because it is the closest contact that a financial organization has with the IRS. Improper reporting not only leads to compliance errors, but it may lead to an IRS audit.

Reporting errors happen in a number of ways. Perhaps the financial organization’s internal transaction processing system is programmed incorrectly, with the result that the system transaction code doesn’t report the proper IRS distribution code on Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. Or maybe the wrong transactions are being reported due to inadequate training (e.g., a nonreportable transfer reported as a rollover). Whatever the reason, the IRS does not view lack of training or erroneous computer problems as valid reasons for incorrect reporting. Even if a financial organization contracts with a data processing firm, the financial organization ultimately is responsible for any incorrect reporting penalties.


Noncompliance with federal income tax withholding requirements is common—frequent mistakes include not withholding as the IRA owner directed, failing to give IRA owners the required withholding notices, or failing to retain the proper records to correctly report withholding. Each of these errors comes with its own penalty, from $10 per failure for not giving notice to $50 per IRA for which proper records were not kept. And the penalty for not withholding when required is the dollar amount that should have been withheld. Clearly, these penalties can quickly add up.

Financial organizations should review their procedures and check their IRA owners’ files to ensure that they are meeting the federal (and state, if required) withholding requirements.

Beneficiary Payouts

IRA beneficiary payout options are complex, and correctly paying out to a beneficiary can be a challenge. Death distributions often are reported in the wrong name and tax identification number. Any IRA distribution made after the IRA owner’s death must be paid to the beneficiary and must be reported on Form 1099-R in the beneficiary’s name and Social Security number. A common mistake is that the deceased owner’s required minimum distribution (RMD) was paid out—often an automatically scheduled payment—to the owner’s checking account instead of paid to the beneficiary.

Although these errors may be corrected, a large number of corrections may draw the IRS’ attention and trigger an audit. 

Take Action

Compliance issues are a risk for any financial organization administering IRAs. And by the time an IRA program is audited, it is usually too late. Financial organizations can take a proactive approach. By investing in IRA training and regularly conducting internal audits, they can minimize the risk for errors.


Financial organizations may find it helpful to work with an IRA services provider, such as Ascensus. In addition to offering a variety of IRA training, including on-site and distance learning options, Ascensus offers a compliance review and operational assessment in which an experienced Ascensus ERISA consultant evaluates a financial organization’s IRA program on site. Based on the findings, Ascensus makes recommendations on updated procedures to help the financial organization bring their IRA program into compliance. Visit Ascensus to learn more about IRA training and compliance services.