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Surprising Info from the IRS
Old 03-06-2010, 06:47 PM   #1
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Surprising Info from the IRS

We have two 72T withdrawals from separate IRAs. Both were set-up according to IRS regulations, and the withdrawal is a little to the conservative side.

We received a letter from the IRS in November 09 that we owed the 10% penalty for early withdrawal from an IRA. This is the second time that our withdrawals have been questioned, the other time was our 2006 return. It took nearly a year to reach resolution for that- no additional tax due. They don't ever send a letter- they just stop sending collection notices. It was handled by the Austin, Texas office. People I talked to were nice enough, bit none had a clue about IRA early withdrawals. Finally worked it through the taxpayer Advocate.

This time, the notice we received was for tax year 2008, but the amount in question was exactly the same. This was from the Philadelphia office. What is near Philly? Valley Forge, PA?

Anyway, I immediately called the contact number. Again, they were nice enough, except they had no info from the previous dispute, except they could see that "something" happened with the 2006 return, Sorry, but I would need to start all over. My next call was to the Taxpayer Advocate on the notice- This time in Philly. Long story short, she had it straightened out in about 3 weeks. And called to let me know.

Here is the surprising part. Our return is very simple, standard deductions and form 5329, Early Withdrawal from an IRA. They did not have the 5329 form. Only two 1099s from Vanguard, showing the withdrawals as "1". Form 5329 is what you file to say that Vanguard is wrong again this year, the code should be "2".

I asked her to look at 2006. No 5329 there, either.

I file electronically, and have both returns as PDF files. Both PDF have form 5329.

Her suggestion? File paper forms.
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Old 03-06-2010, 07:06 PM   #2
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I file electronically, and have both returns as PDF files. Both PDF have form 5329.

Her suggestion? File paper forms.
My suggestion is to post this on as many consumer/accounting/news blogs as I could. The IRS would nip this in the bud quite quickly, I suspect.
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Old 03-06-2010, 07:48 PM   #3
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The way I read it is that whatever vendor you used to e-file has a bug and does not transmit the 5329 form even if they create PDFs with it for you to print and read.
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Old 03-06-2010, 08:00 PM   #4
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What software did you use?
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Old 03-06-2010, 08:37 PM   #5
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For the last few years, Vanguard has offered "Turbo-Tax" online. I use that-2009 is already done there but not submitted.
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Old 03-06-2010, 08:38 PM   #6
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My suggestion is to post this on as many consumer/accounting/news blogs as I could. The IRS would nip this in the bud quite quickly, I suspect.
Well, I'm not sure the IRS is a cage I want to rattle.......
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Old 03-06-2010, 08:50 PM   #7
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This sort of thing is why the IRS can deal with my phone book of a paper return every year, rather than the much more efficient electronic filing.
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Old 03-06-2010, 08:56 PM   #8
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This sort of thing is why the IRS can deal with my phone book of a paper return every year, rather than the much more efficient electronic filing.
Amen.
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Old 03-06-2010, 11:15 PM   #9
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Only two 1099s from Vanguard, showing the withdrawals as "1". Form 5329 is what you file to say that Vanguard is wrong again this year, the code should be "2".
Does Vanguard not know that you're doing a 72(t) and put a "2" in the box? Because if they did then it sounds like this whole issue would go away...
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Old 03-07-2010, 06:26 AM   #10
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Only two 1099s from Vanguard, showing the withdrawals as "1". Form 5329 is what you file to say that Vanguard is wrong again this year, the code should be "2".
This is standard practice for Vanguard (and others) as related to "exceptions" on IRA distributions.

I had the same problem with my (disabled) son's Roth IRA distributions for the 2005 tax year.

He converted his traditional IRA's to Roth back in the late 90's, and paid the tax due at that time.

In 2001, he was deemed totally disabled by SS and receives SSD funds every month due to his disability.

In 2005, he needed funds to move into a group home. Knowing that he would never need the Roth funds, they were liquidated to pay for his "new household setup" expenses. At year end, his 1099 also showed normal distribution, even though I had talked to Vanguard on the situation. He did not receive the code of distribution due to disability.

Vanguard sent me a response (which I attached to the paper return) which stated that as of that year, they were instructed by the IRS that they could no longer code the 1099's for exceptions; they were to be coded as normal distributions and it was up to the IRS (and the taxpayer) to sort it out.

It took three years of going through the IRS, the Taxpayer's Advocate office, and my congressman's office to get it resolved.

I can see why this is being done, since anybody can call and request a code be put into a form. Vanguard (or any other company) is not a taxing authority and could be compromised if the info is incorrect. I would suppose that this was a finding of the IRS in the past, and that's why the rule was changed.

While I'm not subject to the rules of early distribution of IRA's under 72T's, I'm wondering how the government would know (especially if you have multiple IRA fund management funds) if you are truly taking out all the required funds, from the various firms?

Anyway, that's my story...
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Old 03-07-2010, 09:14 AM   #11
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While I'm not subject to the rules of early distribution of IRA's under 72T's, I'm wondering how the government would know (especially if you have multiple IRA fund management funds) if you are truly taking out all the required funds, from the various firms?
That's a bureaucratic shame. IRA alleged "custodians" already report their balances to the IRS annually on form 5498 and we taxpayers are required to file form 8606 under certain circumstances. IIRC IRS even requires fund companies to inform beneficiaries of RMD amounts.

Some enterprising fund company that wanted to get a large share of IRA custodial duties under the guise of "customer service" could whip up a form like 5329 to be filled out by the taxpayer and then use the 1099-R to report what the taxpayer told them. No different than what's done now with Roth IRA conversions. Pouting that the IRS told them not to... that's just lame.

Sounds like the IRS also needs to fix its computerized filing system to keep better track of the 5329s. I know it works very very well for 1099s.
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Old 03-07-2010, 10:25 AM   #12
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Sounds like the IRS also needs to fix its computerized filing system to keep better track of the 5329s. I know it works very very well for 1099s.
Remember, the 1099's represent "tax due", whereas the 5329 represents "tax credit/avoidance".

It's easy to take the path of "you owe me, unless you can prove differently".

Yeah, been there - done that ...
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Old 03-07-2010, 12:00 PM   #13
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I'm certain there is no huge warehouse where the IRS stores old paper tax forms. At some point, every return is reduced to an electronic image.


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Remember, the 1099's represent "tax due", whereas the 5329 represents "tax credit/avoidance".

It's easy to take the path of "you owe me, unless you can prove differently".

Yeah, been there - done that ...
Are you suggesting that some people get a deficiency notice from the IRS and pay-up rather than disagree?

So cynical. I like that.
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Old 03-07-2010, 03:16 PM   #14
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Are you suggesting that some people get a deficiency notice from the IRS and pay-up rather than disagree?
Every IRS letter I've ever received has had plenty of places to indicate how you're going to pay, but they never seem to even consider that you might want to disagree with their assessment of the situation.

The IRS letters are almost as bad as the California ones...
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Old 03-07-2010, 03:22 PM   #15
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Every IRS letter I've ever received has had plenty of places to indicate how you're going to pay, but they never seem to even consider that you might want to disagree with their assessment of the situation.

The IRS letters are almost as bad as the California ones...
I've heard it said that in the USA you are innocent until proven guilty except for the IRS and SEC where you are guilty unless you prove you are innocent.
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Old 03-08-2010, 09:16 AM   #16
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... except for the IRS and SEC where you are guilty unless you prove you are innocent.
My brother-in-law the tax CPA says that if the IRS ceased to exist then he'd have to find himself a real job...
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Old 03-08-2010, 09:56 AM   #17
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Do forms need to get filed? Or am I thinking of worksheets?
or are the only things which get filed the 1040 and the schedules?
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Old 03-09-2010, 12:48 PM   #18
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This sort of thing is why the IRS can deal with my phone book of a paper return every year, rather than the much more efficient electronic filing.
Absitivley. I will never file an electronic one unless I am required to do so. i think that its more likely that a real person of some knowledge will respond to paper and that they put the newbies on electronic.
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Old 03-09-2010, 02:13 PM   #19
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I remember one time when I decided that I didn't need the tax software to do it and I filled in the box labeled "final Return". This requires an immediate audit. So they called me, and that's when I discovered they had an office in my local town. I told them that I wasn't really dead just figured that it was my final return that year. Then they wanted to audit my LLC which was only a holding company for my assets, but was called for IRS purposes as a investment firm.

They were demanding that I come in immediately with all my investment records. With college expenses almost all of the assets had been liquidated. So I said, that I would be happy to be in with my house deed and my two CD certificates. They said, "That's all? That's all you have for investment?" I said, "Yeah, knock yourself out!". He said, "I'm not doin' that. That's nutz. Just write me a letter at this address stating that you only have your paid up house and two CD's in the LLC, and we'll call that your audit."

Sometimes!!??..... I have many other stories.

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Old 03-09-2010, 02:19 PM   #20
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So cynical. I like that.
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