Battling IRS’ Bureaucratic ‘Bafflegab’
Question: After coping all of my adult life with the idiocies perpetrated by the Internal Revenue Service, I thought I had just about seen everything and was beginning to take heart in the apparent sincerity in Washington about simplifying the whole tax procedure. Hah!
That was before my accountant called me in mid-August to make sure that I had filed my Form 5500-C and my Schedule P.
I asked what on earth (cleaning up my language a bit) Form 5500-C and Schedule P are. These, it seems, are new reporting forms required for those of us who, years ago, were foolish enough to open a small Keogh Plan (HR-10) for the self-employed--a tax-deferred investment program comparable to the later Individual Retirement Account.
In my own case, this Keogh Plan was opened with a mutual fund about 20 years ago, and I have contributed very little to it in recent years--it has simply been sitting there accumulating reinvested dividends--and no “reporting” on it has ever been required. Now, suddenly, my wife and I (she has an HR-10 too) are being treated like General Motors reporting on the status of a retirement plan for thousands of employees.
Form 5500-C turns out to be a six-page horror containing questions like this: “Information about employees of employer at end of the plan year. (A) Does the plan satisfy the percentage test of Code section 410(b)(1)(A)? If ‘No’ complete only (b) below and see Specific Instructions.”
Now, I ask you, what sort of layman is even going to know what this means, particularly as it applies to a single individual’s one-time, simple mutual fund investment in a Keogh Plan? I also had to make a special trip to the Federal Building to pick this thing up.
Worse yet, the deadline for filing this mess was Aug. 30 and, failing there, a $25-a-day penalty will be extracted.
Also, it seems, only the “fiduciary” (in our case the two mutual funds involved) can supply us with this Schedule P, which they also have to sign. Frantic calls were made to both our accountant and the IRS, and long-distance calls to our mutual funds asking why we were never supplied with this essential information.
The accountant’s advice: Apply for an extension to stave off the $25-a-day fine. This was done--more postage.
Obviously, no one--even the mutual funds involved--know what in the name of heaven the IRS wants: My wife’s fund sent her a properly made-out Schedule P, but no instructions on how to fill out the Form 5500-C, without which it is totally incomprehensible. My mutual fund sent me some fragmentary instructions for filling out Form 5500-C, but no Schedule P. Another long-distance call: “Oh, we didn’t know we were supposed to supply that!”
Meanwhile, our application for an extension was delayed, because both of us failed to provide our “employer identification number” (for 20 years this has simply been our respective Social Security numbers) and our “three-digit plan number.” How to provide this information, of course, was only received when the two mutual funds provided it--and which we, obviously, didn’t have when we applied for the extension and which is why we needed the extension in the first place.
This paper shuffling for the sake of paper shuffling is the sort of idiocy that has made the entire tax structure such a laughingstock. What on earth is all of this supposed to prove? Both Keogh plans are for individuals; the income accrued is tax-deferred and is none of the government’s business until we begin to draw from it. This is the way Uncle Sam is supposed to be encouraging self-retirement to take some of the burden off Social Security?
I have had a needless trip to the Federal Building, the expense of at least three long-distance calls and have already spent about $3 on postage and I’ve missed the deadline. Is there any rational explanation for this nonsense?
The final irony is the tag line that appears under the heading “Application for Extension of Time,” to wit: “For Paperwork Reduction Act Notice, see Instructions.”--D.C.
Answer: Why does this remind us of the apocryphal story coming out of World War II about the sailor who was stationed for a one-year tour of duty on a lonely Pacific atoll tending a one-man weather station? Bored beyond belief, the sailor began sending monthly reports back to headquarters along this line:
Monthly Fly Report for March Flies exterminated with spray.........12,378
Flies exterminated by hand...............639
Flies exterminated otherwise (swatter) .1,252
Total .................................14,269
The reports were never acknowledged, and at the end of his year of duty, the sailor was given leave in Honolulu and his place was taken by another sailor.
After two months, the following, crackling, wire from headquarters was received by the baffled new man: “Explain fullest and soonest reason for missing fly reports for Jan-Feb.”
Paper work, alas, is its own excuse for being, and the Internal Revenue Service’s current fly report is, indeed, Form 5500-C and Schedule P, two pieces of bureaucratic “bafflegab” without which we all, somehow, managed to survive before 1985.
The reason for all of this, according to a spokesman for the IRS in Washington, who prefers to remain nameless (and who can blame him?), is “that when TEFRA (the Tax Equity Fiscal Responsibility Act) was passed in ‘82, it greatly loosened up and made more flexible all qualified HR-10 plans, and that included not only individual Keogh plans, but corporate plans as well.
“The good news was that it made all HR-10 plans more flexible and did away with the differences between the individual and the corporate plans. The bad news was that it made the individual plans subject to more complex rules too.”
Oh.
Before 1982, that is, the rules, admittedly, were pretty rigid for both individuals and, in particular, corporations. Doctors, lawyers, and other “corporations,” for instance, could open a Keogh Plan for themselves only if they covered all of their employees too; there had to be a third-party trustee, contributions were limited to $15,000 a year, and what-not. TEFRA changed all of this, jumped the contribution for corporation plans to $45,000, eased the trustee rule and permitted them to exclude some employes.
“But,” the IRS spokesman adds, “this wasn’t right, because it was more generous for corporate plans than individuals. So, for instance, the dollar limit on contributions was changed to $30,000 for both, and the other differences were eliminated too. At the same time, though, parity was required, and there had to be one body of law for all.”
The suspicion arises that you would have preferred that the IRS shouldn’t have done you such an overwhelming favor.
Admittedly, the spokesman continues, “certain questions on the Form 5500-C aren’t applicable to the individual and, in the future, we should probably simplify it or, maybe, devise a new form for the individuals--skipping a lot of these questions.”
For whatever comfort we can take in it, this detailed report will only have to be filed every three years (hot diggity!) and, in ’86 and ‘87, we can get away with filing Form 5500-R, “which is quite simple and only one page.”
But why is all of this necessary for the individual, anyway?
“Well,” he counters, “it is necessary because the potentiality has changed. We’ve found that some ‘pension’ funds were actually being used as personal bank accounts under the more flexible rules. We’ve had some of these assets being used, for instance, to purchase a yacht-- that’s not saving for retirement!”
One bright spot: That $25-a-day fine for filing late has been extended. It now applies only if you file after Sept. 30.
From another observer familiar with the IRS comes this possible explanation for the paper work: “I think it’s just plain nosiness. They (the government) have always known how many Keogh plans there were outstanding, but they didn’t have any handle on how much money they represent. Now, they will.”
