Cheated on my taxes

[slowsaver]

I used the backdoor Roth method to put $5k/yr into a Roth IRA at Vanguard between 2008-2013 (5 yrs). I paid no taxes on the transfers because I didn't realize that the $100k traditional IRA I had at Fidelity needed to be considered. I claimed 100% of the $5k tax free each year. That was wrong.

Once I realized my error (in 2013), I stopped doing any backdoor roth and haven't touched the roth account since. Just waiting for a letter from the IRS...

Well, it's been 8 years and the IRS still hasn't contacted me.

So, did I get away with this? Or, is this going to hit me when I try to take money out of the roth in 10 or 20 years? I'm actually thinking about leaving the roth to someone when I die, rather than touch it and trigger some tax skeleton in my closet.

 

[Sunset]

Hopefully you have the money invested in the roth and it's growing...

I'd say you can relax, don't mix more money into that roth, open another one for any roth activities you want to do. I'm saying this just so it's cleaner in case you are caught, no need to make it messier.

Bottom line, I think you are fine.

Just don't get fooled by the phone scammers pretending to be the IRS, as you are probably sensitive to that wording

Some people might tell you to fess up, it will be quite a can of worms, to calculate the needed taxes, and could cause quite a lot of trouble, as some keen tax employee might want to make an example of you like they did for Al Capone

 

[donheff]

IANAL but making a mistake years ago does not seem like anything to worry about. Here is an ABA discussion on the topic that should reassure you.

 

[slowsaver]

Thanks for the encouragement. I agree, I have no intention of opening a can of worms with the IRS, if I don't have to.

I'd say you can relax, don't mix more money into that roth, open another one for any roth activities you want to do. I'm saying this just so it's cleaner in case you are caught, no need to make it messier.

Well, one sad thing about it was that I had invested in this particular Roth for 7 years (2000-2007) via the "front door," and used the same roth for 5 years of "back door" activity. Surely I'm not going to touch it anymore. Yeah, it's grown to about $200k now -- but that's only 5% of my current portfolio.

I keep hearing noises about taxing wealth and possibly changing the rules around the Roth because some people are getting really rich off them. I think I'm just going to steer clear of the Roth IRA from now on.

 

[ducky911]

I have yet to take any money out of my IRA. I would think that I would get a 1099 or equivalent if I did. Seems odd that it would be on the honor system. But again I have no experience with this.

 

[slowsaver]

IANAL but making a mistake years ago does not seem like anything to worry about. Here is an ABA discussion on the topic that should reassure you.

Good article. Thank you! Seems my issue "might" fall under number 3 ("basis overstatement") which can be audited within 6 years, but most categories would be only 3 years. Anyway, I agree I'm probably in the clear with 8 years.

Funny: It was this forum where I learned I was doing my backdoor roth wrong. Wow, I've been hanging around 8 years! Learned a lot of good stuff, even as a part-time reader.

 

[cathy63]

It's very unlikely that the IRS will catch this. For the years where you were doing the back-door Roth conversions, it sounds like that Fidelity tIRA was sitting idle. If you didn't add money to it or roll money out of it, then Fidelity didn't generate any 1099-Rs or 5498s for that account, so when the IRS computers looked at your returns that showed the conversions they matched up with the docs they got from the custodian and no red-flag alert was thrown.

Technically they do have enough information to figure out that there might be a problem, but it's spread over multiple years of your tax returns. They would have to look at the returns where you established and contributed to the Fidelity tIRA in order to know that it had pre-tax funds in it, and then they'd have to look at all the intervening returns before you started doing Roth conversions to verify that you hadn't taken the funds out and paid the taxes. And of course it's possible that whatever you invested in at Fidelity had lost money and the balance in that account had gone to $0 in the interim; so even if they figured out that you had a pre-tax account at one time, they can't just assume that it still had money in it when you did the Roth conversions. (edit: this paragraph is not quite correct. It turns out that Fidelity did file a 5498 with the IRS for each year, even though they didn't have to send it to you, so the IRS did know that account existed during those years. They can't calculate the basis without going back over your prior returns though.)

Also, all of your questionnable tax returns are outside the 3-year and 6-year audit windows. They can only go back farther than that if they have evidence of substantial ongoing fraud. Assuming the $5K was less than 20% of your income for those years, they really don't have any reason to investigate you.

I don't think you even need to avoid doing future Roth conversions or contributions if that's something that fits in with your income and tax strategies. Just do your future returns correctly and you'll be fine.

 

[MC Rider]

Sounds like you are too small a fish for them to bother frying.
Even if they figure it out.

 

[Sunset]

Sounds like you are too small a fish for them to bother frying.
Even if they figure it out.

No such thing as too small.

I've had the tax folks discuss with me a return that was done a little incorrectly.
They wanted me to correct the form, which of course affected other forms.

I pointed out the correction, made no difference, and still zero tax was due.

Well, they were insistent, I had to dot the i's and cross the T's so it was perfect.

The tax department wasted about 1 hour to find the mistake, 30 minutes to discuss it with me, and probably another 1 or 2 hours to accept, inspect, record the corrections.

Thank Goodness it's only tax payer money that was being wasted

All for $0.00 in taxes..

 

[HawkeyeNFO]

IRS is a complete mess. They became a political football, and ended up with their budget slashed, so they had to get rid of employees. And with the federal government not really fully in the office due to Covid (we are supposed to be at less than 40% in my office), and with all the limitations on 3 years / 6 years, I'd ask God for forgiveness, and not bother the IRS.

 

[Aerides]

No such thing as too small.

I incorrectly calculated tips on my first "adult" tax return. I missed about $1700. By the time the IRS notified me, interest and penalties were added and this was 1989 so it was an extra chunk. They didn't even tell me what I owed (despite me calling and offering to pay right away) and kept adding for another 6 months.

It was tiny by any standard here and today...but not too small for the IRS!

Still, the OP should be fine. It's past the 7 year lookback, and with staffing deficits and the complexity of Roths and IRA's I'd feel safe in your shoes.