Many employers offer a tax-deferred retirement benefit to employees. Employees can elect to put a portion of their paycheck into their retirement accounts every pay period. The retirement account invests the money so that the employee's nest egg grows and by the time he retires, he has a tidy sum waiting for him. Employees don't normally report retirement contributions as income on their taxes, although in some cases they may be able to get a tax credit for contributions.
The Internal Revenue Service requires employers who offer retirement benefits to file Form 5500 annually. Form 5500 lists the total amount of assets the benefit plan holds. The IRS doesn't get specific information about what is in an individual employee's account from this form. But it does see how many assets are in the plan altogether and what distributions have been made from the plan.
Workplace 401k plans and other tax-deferred savings accounts don't require you to pay taxes on your contributions until you withdraw the money from the account. Thus, you don't need to report your retirement savings to the IRS as income. However, if you withdraw any money from your retirement savings account, you must report the distribution as income for the year in which you took it.
If you withdraw money from a 401k before the age of 59 1/2, you have to pay a penalty tax of 10 percent for early withdrawal, plus income taxes on the amount withdrawn. Your plan administrator withholds the taxes before giving you your distribution. You still have to pay income taxes on the distribution in the year you receive it. Thus, the IRS needs to know the value of your distributions even if it doesn't need to know what's left in your account.
If you don't pay your taxes as required, the IRS may take collection activity against you, including levying your accounts. The IRS examines all of your assets when deciding what to do to collect the money you owe. It may seize part or all of your retirement account funds to satisfy your debt. Thus, if you owe money to the IRS, the IRS has the right to know the value of your retirement accounts, even if you are under the age of 59 1/2.