Millions of Americans Dodging Taxes on Early Retirement Withdrawals

What You Need to Know

Nearly 3 million taxpayers who received $12.9 billion in 2021 failed to pay the extra 10% tax, according to a Treasury watchdog.
These taxpayers could be subject to approximately $1.29 billion in additional taxes and $322 million in in Form 5329 penalties.
Approximately 2.3 million of these taxpayers didn’t report the distributions as taxable income, TIGTA finds.

Nearly 3 million taxpayers who received early retirement plan distributions of $12.9 billion failed to pay taxes, according to a newly released report from Treasury Inspector General for Tax Administration.

TIGTA’s analysis of 2021 tax return information identified approximately 2.8 million taxpayers who received early distributions of approximately $12.9 billion but did not pay the additional 10% tax and did not file Form 5329, according to the report.

“These taxpayers could be subject to approximately $1.29 billion in additional taxes and/or approximately $322 million in Form 5329 failure to file penalties,” TIGTA said.

Additionally, approximately 2.3 million of the 2.8 million taxpayers did not properly report $11.4 billion in early distributions as taxable income, including 880 taxpayers with distribution amounts over $200,000, according to the TIGTA report.

“In general, taxpayers for whom third parties reported early distributions should have reported and paid the additional 10% tax, filed a Form 5329 claiming an exception, or both if only a portion of the early distribution was excepted,” the report states.

The failure to file penalty for Form 5329 applies to the amount owed from the return due date (not the extended due date) until the form is filed, with a maximum delinquency of five months (5% per month, 25% maximum penalty).