IRS Wants Me To Complete a Form 8606.....

[Looking4Ward]

In a separate thread I explained how the IRS sent me a letter claiming I owed taxes on a Roth conversion that was recharacterized.

I sent them copies of 1099-R's and 5498's from both 2015 showing the IRA to Roth conversion and 2016 showing the full recharacterization.

Today I get a reply from the IRS asking me to "Complete Form 8606, Nondeductible IRA's Part II, to determine the taxable portion of your Roth IRA distribution" or to otherwise send in the tax and penalties due.

I'm looking at Part II of Form 8606 for 2015 which states:

"Complete this part if you converted part or all of your traditional, SEP, and SIMPLE IRAs to a Roth IRA in 2015 (excluding any portion you recharacterized)."

I converted $11K of an IRA to a new Roth account in 2015, which had grown slightly to $11,026 when I recharacterized all of it back to the original IRA in January 2016.

Line 16 states:

"If you completed Part I, enter the amount from line 8. Otherwise, enter the net amount you converted from traditional, SEP, and SIMPLE IRAs to Roth IRAs in 2015. Do not include amounts you later recharacterized back to traditional, SEP, or SIMPLE IRAs in 2015 or 2016 (see instructions)"


Again, I converted $11K from an IRA to a Roth IRA in 2015. I recharacterized all of it back to the original IRA in 2016. They didn't tell me to complete Part I, just Part II. Do I just enter $0?

Line 17 states:

"If you completed Part I, enter the amount from line 11. Otherwise, enter your basis in the amount on line 16 (see instructions)"

I didn't complete Part I and don't understand what I'm supposed to enter here.

My understanding is you don't need to fill out a Form 8606 if you recharacterized the full amount (which I did). Are they simply asking me to send back the Form with $0 on it to show I don't owe any tax on the recharacterization or do they still not understand what I did?

 

[LOL!]

I'm not going to read the detailed F8606 instructions, but I recall they state something like, "Attach a statement to your tax return with ...."

I have done a few recharacterizations and my tax software (HRBlock) helped me create the statements which get attached to your "tax package", so the statements appear no where on the 8606.

And just to be clear: The instructions for Form 8606 mentioned on lines 16 and 17 are in a separate IRS document.

 

[Looking4Ward]

I'm not going to read the detailed F8606 instructions, but I recall they state something like, "Attach a statement to your tax return with ...."

I have done a few recharacterizations and my tax software (HRBlock) helped me create the statements which get attached to your "tax package", so the statements appear no where on the 8606.

And just to be clear: The instructions for Form 8606 mentioned on lines 16 and 17 are in a separate IRS document.

Reading the instructions they indicate NOT to include any amounts that were recharacterized. Since I recharacterized the entire conversion, is it correct to put $0 in Lines 16, 17 and 18?

 

[kaneohe]

As LOL indicated, perhaps the most important thing is the narrative that describes the conversion and the recharacterization. Here is IRS example from
IRS F8606 instructions:

Example. You are married filing
jointly and converted $20,000 from your
traditional IRA to a new Roth IRA on
May 20, 2016. On April 7, 2017, you
decide to recharacterize the conversion.
The value of the Roth IRA on that date is
$19,000. You recharacterize the
conversion by transferring that entire
amount to a traditional IRA in a
trustee-to-trustee transfer. You report
$20,000 on Form 1040, line 15a. You
don’t include the $19,000 on line 15a
because it didn’t occur in 2016 (you also
don’t report that amount on your 2017
return because it doesn’t apply to the
2017 tax year). You attach a statement
to Form 1040 explaining that (a) you
made a conversion of $20,000 from a
traditional IRA on May 20, 2016, and (b)
you recharacterized the entire amount,
which was then valued at $19,000, back
to a traditional IRA on April 7, 2017

 

[Looking4Ward]

As LOL indicated, perhaps the most important thing is the narrative that describes the conversion and the recharacterization. Here is IRS example from
IRS F8606 instructions:

Example. You are married filing
jointly and converted $20,000 from your
traditional IRA to a new Roth IRA on
May 20, 2016. On April 7, 2017, you
decide to recharacterize the conversion.
The value of the Roth IRA on that date is
$19,000. You recharacterize the
conversion by transferring that entire
amount to a traditional IRA in a
trustee-to-trustee transfer. You report
$20,000 on Form 1040, line 15a. You
don’t include the $19,000 on line 15a
because it didn’t occur in 2016 (you also
don’t report that amount on your 2017
return because it doesn’t apply to the
2017 tax year). You attach a statement
to Form 1040 explaining that (a) you
made a conversion of $20,000 from a
traditional IRA on May 20, 2016, and (b)
you recharacterized the entire amount,
which was then valued at $19,000, back
to a traditional IRA on April 7, 2017

I understand that - but the IRS is telling me they want me to complete Part II of Form 8086 even though I've already explained to them that the 2015 Roth conversion was completely recharacterized in 2016. According to the instructions for Form 8086, I would not include any amounts recharacterized on lines 16, 17, and 18 of Part II - the only lines they want me to fill out.

So I'd be putting $0 in those three lines. Which seems kind of silly because normally a Form 8086 isn't required unless a portion of a conversion is recharacterized.

 

[kaneohe]

I understand that - but the IRS is telling me they want me to complete Part II of Form 8086 even though I've already explained to them that the 2015 Roth conversion was completely recharacterized in 2016. According to the instructions for Form 8086, I would not include any amounts recharacterized on lines 16, 17, and 18 of Part II - the only lines they want me to fill out.

So I'd be putting $0 in those three lines. Which seems kind of silly because normally a Form 8086 isn't required unless a portion of a conversion is recharacterized.

Agreed it does sound a bit silly but why not humor the auditor by doing that......seems 1000x faster to do that than the alternative. Perhaps a 0 there means something to them.........that something was done here w/ a net of 0 vs a blank which might mean not relevant/nothing happened. You would have thought that the auditor could have filled in the form w/ your previous explanation .

 

[LOL!]

Did you include the required statement on your original return?

And if you did and filed electronically, are you sure your tax software sent the statement with the electronically-filed return?

 

[ocean view]

Yes, to complete the form seems pointless, but sometimes with the IRS you have to cut their food and chew it for them. So complete the 8606 to definitively tell them that you have nothing to report by writing "NONE" on those lines and send it back as requested.

 

[Looking4Ward]

Thanks. I'll resend all of the documentation I've previously sent as well as the Form 8606 filled out with $0 amounts with another detailed statement and see if that satisfies them.

 

[Blue Collar Guy]

Thanks. I'll resend all of the documentation I've previously sent as well as the Form 8606 filled out with $0 amounts with another detailed statement and see if that satisfies them.

I really think you need to speak to someone at the IRS on the phone, you are shooting the dice by mailing it back to maybe a bozo, that is lost on the subject.

I remember getting nasty notes, when I was at work. Something like "Immediately fax over the recap of activity to P.O. Jones at headquarters." I did it already, sometimes several times. A phone call to Jones went something like this, "Hey Guy, this is the BCG, I sent this thing 3 times already, dont make me come down to HQ and find you sitting behind a desk while my boss is screaming at me. Go to the effing fax machine Im sending it now, let me know you got this 4th copy and you can read all the numbers".

Now of course with the IRS It would be "Hello Mr IRS, thank you for taking my call, This form 123xyz for my issue was done already. Are you looking for a resend? Line number 345 I put a zero is that ok?. Yes sir, Ill send it to your attention, thank you so much for your help. Then put your phone number on the paperwork. I have had them call me.