Letter from IRS about Roth Recharacterization

[Looking4Ward]

In 2015 I converted a portion of my tIRA to a Roth. In January of 2016, I re-characterized the entire conversion.

Used TurboTax to do my 2015 taxes in March of 2016, after having it download all forms from Vanguard it picked up on the distribution and the exemption code, and asked if any or all was re-characterized. I answered Yes and went on to file my return online. Apparently, TT didn't include the distribution anywhere on my return.

Last month I got the letter from the IRS about "unreported income" with the amount of taxes and penalties due.

I responded with copies of forms 5498 and 1099-R that Vanguard furnished just this year (which I didn't even know they existed thus never filed an amended return) with a statement that the amounts in question were a tIRA to Roth conversion that was then re-characterized.

Do you think that will be sufficient? I only got a letter back acknowledging that they received my information and will review it.

[Souschef]

Quote:

Originally Posted by Looking4Ward In 2015 I converted a portion of my tIRA to a Roth. In January of 2016, I re-characterized the entire conversion. Used TurboTax to do my 2015 taxes in March of 2016, after having it download all forms from Vanguard it picked up on the distribution and the exemption code, and asked if any or all was re-characterized. I answered Yes and went on to file my return online. Apparently, TT didn't include the distribution anywhere on my return. Last month I got the letter from the IRS about "unreported income" with the amount of taxes and penalties due. I responded with copies of forms 5498 and 1099-R that Vanguard furnished just this year (which I didn't even know they existed thus never filed an amended return) with a statement that the amounts in question were a tIRA to Roth conversion that was then re-characterized. Do you think that will be sufficient? I only got a letter back acknowledging that they received my information and will review it.

I believe it might be. In my case I got the same kind of letter. I made a directed withdrawal from an IRA for a QCD (Qualified Charitable Distribution). Since it was the only withdrawal from that account, the IRS computer was looking to match the 1099R to my return.
I responded to the IRS by sending a copy of my 1040 indicating the QCD, and copies of the TT input sheet for that 1099R, and the TT summary sheet for all the 1099R's.
That was enough to satisfy them.

[RunningBum]

I think it will be enough. I don't see how it couldn't be. You recharacterized it all, so it's like it never happened, how can you be taxed? This is the one hassle with recharacterizations though. VG (and probably anyone else) doesn't give you anything for it until the next year, so it's easy for the IRS to make the assumption you just didn't report it. You've given them the proof. If they need more you can probably show the account statements from the IRA showing the money moved out, and then moved back in.

[kaneohe]

Quote:

Originally Posted by Looking4Ward ................Apparently, TT didn't include the distribution anywhere on my return. Last month I got the letter from the IRS about "unreported income" with the amount of taxes and penalties due. ..................................................

What was reported on lines 15a/15b of the 1040? The distribution should have been reported on 15a with 0 on 15b. Since the recharacterization was not reported on 1099R till the following year, it was important for TT to include a narrative description of the recharacterization so IRS could figure out what happened to that distribution. Does TT have a bug? Perhaps you could call TT and see what they say.........is an improvement in the procedure required or in the guidance/questions they ask in the interview.

[RunningBum]

Quote:

Originally Posted by kaneohe What was reported on lines 15a/15b of the 1040? The distribution should have been reported on 15a with 0 on 15b. Since the recharacterization was not reported on 1099R till the following year, it was important for TT to include a narrative description of the recharacterization so IRS could figure out what happened to that distribution. Does TT have a bug? Perhaps you could call TT and see what they say.........is an improvement in the procedure required or in the guidance/questions they ask in the interview.

You're right, I went back and looked at my tax returns, and I did report the original conversion amount on 15a, and final conversion after recharacterization on 15b, with an explanation statement attached. All prompted by TT. So the OP might want to or have to file an amended return showing the same on theirs. Net of 0 change to taxes.

[Looking4Ward]

Quote:

Originally Posted by kaneohe What was reported on lines 15a/15b of the 1040? The distribution should have been reported on 15a with 0 on 15b. Since the recharacterization was not reported on 1099R till the following year, it was important for TT to include a narrative description of the recharacterization so IRS could figure out what happened to that distribution. Does TT have a bug? Perhaps you could call TT and see what they say.........is an improvement in the procedure required or in the guidance/questions they ask in the interview.

Quote:

Originally Posted by RunningBum You're right, I went back and looked at my tax returns, and I did report the original conversion amount on 15a, and final conversion after recharacterization on 15b, with an explanation statement attached. All prompted by TT. So the OP might want to or have to file an amended return showing the same on theirs. Net of 0 change to taxes.

Interesting. I went back and looked at that return and I was mistaken - it wasn't TT that I used that year, it was H&R Block.

Line 15a has nothing entered but Line 16a (Pensions & Annuities) contains the amount that was converted from tIRA to Roth, obtained by the H&R Block software when it interfaced to and downloaded account info from Vanguard. It plugged the data into the wrong line.

Line 16b is $0.

Well, hopefully what I sent to the IRS will be sufficient otherwise it looks like this will be easy to explain. The distribution WAS recorded but on the wrong line, the software didn't prompt for any notations, and Vanguard doesn't send the re-characterization forms until the following year.

[RunningBum]

Quote:

Originally Posted by Looking4Ward Interesting. I went back and looked at that return and I was mistaken - it wasn't TT that I used that year, it was H&R Block. Line 15a has nothing entered but Line 16a (Pensions & Annuities) contains the amount that was converted from tIRA to Roth, obtained by the H&R Block software when it interfaced to and downloaded account info from Vanguard. It plugged the data into the wrong line. Line 16b is $0. Well, hopefully what I sent to the IRS will be sufficient otherwise it looks like this will be easy to explain. The distribution WAS recorded but on the wrong line, the software didn't prompt for any notations, and Vanguard doesn't send the re-characterization forms until the following year.

Remember that when we start talking about which tax programs to use for 2017. H&R Block messed me up too, by not including Form 1116 for Foreign Tax credits. I couldn't use them this year, so I guess they figured why include it, but when I tried to carry the credit back to 2015 with an amended return, the IRS told me I couldn't do it because of no 1116 in 2016. So I had to file a 2016 amended, which was just accepted, and refile my 2015 amended, which I've not heard back about yet.

I won't be using H&R Block again. Not worth the $10 or $20 savings, whatever it was.

[donheff]

I screwed up a California return by checking the wrong box in TT this year. The wrong box was checked because I described the income wrong in the Federal return (CA is treated differently than other states by DW's firm) That resulted in a $50 bill from CA instead of a $50 refund. They wouldn't accept anything less than an amended return with the amended Federal return attached. The thought of the hassles involved, the extra cost to efile it all in TT, and the thought of drawing attention to my Federal return (which includes a second house sale plus medical deductions) was too much so I just paid the difference.

[braumeister]

Quote:

Originally Posted by Looking4Ward I was mistaken - it wasn't TT that I used that year, it was H&R Block. ... It plugged the data into the wrong line.

This is why it's so important to really scrutinize your return before you submit it. The programs are great (I always use TT myself) but I want to thoroughly understand it myself before I send it in.

[jebmke]

Quote:

Originally Posted by RunningBum Remember that when we start talking about which tax programs to use for 2017. H&R Block messed me up too, by not including Form 1116 for Foreign Tax credits. I couldn't use them this year, so I guess they figured why include it, but when I tried to carry the credit back to 2015 with an amended return, the IRS told me I couldn't do it because of no 1116 in 2016. So I had to file a 2016 amended, which was just accepted, and refile my 2015 amended, which I've not heard back about yet. I won't be using H&R Block again. Not worth the $10 or $20 savings, whatever it was.

That's odd. I used HRB in 2015 and 2016 and form 1116 was there. I think this is a form that you have to complete in forms mode as some of the information may not be known to HRB. I always leave this form to the end because I need to finish my state income taxes in order to allocated the state tax deduction to foreign sourced income. I think there is at least one other line on the 1116 that requires manual completion.

I have used a lot of different softwares - I can't recall any of them getting form 1116 right without some user tinkering.

[RunningBum]

Quote:

Originally Posted by jebmke That's odd. I used HRB in 2015 and 2016 and form 1116 was there. I think this is a form that you have to complete in forms mode as some of the information may not be known to HRB. I always leave this form to the end because I need to finish my state income taxes in order to allocated the state tax deduction to foreign sourced income. I think there is at least one other line on the 1116 that requires manual completion. I have used a lot of different softwares - I can't recall any of them getting form 1116 right without some user tinkering.

Did you actually use the foreign tax credit in those years? I think because I was paying $0 in taxes in 2016 and unable to use the tax credit, HRB just omitted 1116 in the filing. But I needed it to carry back the credit.

[Blue Collar Guy]

This is why I pay a guy to do it. If there is a mistake, he does the calls. Sounds like you will owe nothing, just some phone calls, and documents. Good luck keep us posted.

[pjigar]

Quote:

Originally Posted by Looking4Ward I responded with copies of forms 5498 and 1099-R that Vanguard furnished just this year (which I didn't even know they existed thus never filed an amended return) with a statement that the amounts in question were a tIRA to Roth conversion that was then re-characterized. Do you think that will be sufficient? I only got a letter back acknowledging that they received my information and will review it.

Yes, that is good enough. IRS's left hand doesn't talk with right hand. I received that same kind of letter under same circumstance few years back. I never heard back from IRA after I sent them re-characterization information (apart from the acknowledgement letter you received).

[jebmke]

Quote:

Originally Posted by RunningBum Did you actually use the foreign tax credit in those years? I think because I was paying $0 in taxes in 2016 and unable to use the tax credit, HRB just omitted 1116 in the filing. But I needed it to carry back the credit.

I did use the credit, yes.

[gauss]

Do you recall which letter number you received?

It should be listed in the upper right hand corner and of the form CP-xxxx.

You may also wish to obtain a copy of your Tax Account transcript (not to be confused with a Tax Return transcript which only shows your originally filed return) for the year in question. It is a snapshot in time that will show how the IRS views the status of your account.

You will want this to show as no balance due after the IRS has had time to process your response.

https://www.irs.gov/individuals/tax-...-to-order-them

Quote:

Tax Account Transcript - shows basic data such as return type, marital status, adjusted gross income, taxable income and all payment types. It also shows changes made after you filed your original return. This transcript is available for the current tax year and up to 10 prior years using Get Transcript Online or Form 4506-T. When using Get Transcript by Mail or phone, you’re limited to the current tax year and returns processed during the prior three years.

-gauss

[Looking4Ward]

Quote:

Originally Posted by gauss Do you recall which letter number you received? It should be listed in the upper right hand corner and of the form CP-xxxx. -gauss

It's CP2000

Quote:

Originally Posted by gauss You may also wish to obtain a copy of your Tax Account transcript (not to be confused with a Tax Return transcript which only shows your originally filed return) for the year in question. It is a snapshot in time that will show how the IRS views the status of your account. You will want this to show as no balance due after the IRS has had time to process your response. https://www.irs.gov/individuals/tax-...-to-order-them

Good to know, thanks!

[ERD50]

Quote:

Originally Posted by gauss Do you recall which letter number you received? It should be listed in the upper right hand corner and of the form CP-xxxx. You may also wish to obtain a copy of your Tax Account transcript (not to be confused with a Tax Return transcript which only shows your originally filed return) for the year in question. It is a snapshot in time that will show how the IRS views the status of your account. You will want this to show as no balance due after the IRS has had time to process your response. https://www.irs.gov/individuals/tax-...-to-order-them -gauss

Thanks for that, I was not aware.

I saved all that info (quoted/copypaste to a document to capture the full url) to my TAX INFO folder of my hard drive.

Like fire insurance, I hope I never need it! But good to have.

-ERD50

[Looking4Ward]

Quote:

Originally Posted by ERD50 Thanks for that, I was not aware. I saved all that info (quoted/copypaste to a document to capture the full url) to my TAX INFO folder of my hard drive. Like fire insurance, I hope I never need it! But good to have. -ERD50

FYI, I just got all the way thru the registration process to the point it wanted to send a text message to my cell phone. I entered my cell phone number and it refused to continue because it will not complete that verification process to a pre-paid (no contract) cell phone number NOR a Google Voice number. Which just so happen to be the only two types of phone numbers I have

[gauss]

Quote:

Originally Posted by Looking4Ward FYI, I just got all the way thru the registration process to the point it wanted to send a text message to my cell phone. I entered my cell phone number and it refused to continue because it will not complete that verification process to a pre-paid (no contract) cell phone number NOR a Google Voice number. Which just so happen to be the only two types of phone numbers I have

Yes, this put a damper on my ability to receive instant IRS transcripts when they put this requirement into place. Note that you can still request transcripts and have them mailed to you without going through the cell phone account verification. This will add several days to the process each time your request a transcript.

Alternatively, the IRS has developed an additional method to register to receive instant transcripts WITHOUT needing a cell phone account. You need to receive a security code via the US Mail to complete the registration process. You will still need some type of generic phone that receives SMS/text messages in the future each time you request a transcript but it supposedly can be any cell phone.

I have not completed this process yet, but was happy to see that it is being offered now.

https://www.irs.gov/individuals/secu...elf-help-tools

Quote:

Note: If you have a pay-as-you-go mobile phone or a business/family plan mobile phone not associated with your name, you may request that we mail an activation code to the address we have on file for you. You still must have a text-enabled, U.S.-based phone to receive a security code text that completes the validation process and allows returning users to access their accounts

-gauss