Screwup with Roth Conversion Taxes! Help!

[mountainsoft]

For the last three years (2018, 2019, 2020) I converted part of my traditional IRA at Vanguard to my Roth IRA at Vanguard. That went smoothly, and I opted not to have taxes withheld (it wasn't even an option the first year). So I paid a 12% estimated tax (my tax bracket) on the EFTPS web site to cover taxes for the conversion each year.

I specifically contacted my tax preparation service (EZTaxReturn) in 2018 and asked them if they supported Roth conversions. They replied YES and gave me instructions on where to enter the information when answering questions on their system.

It's obviously my fault for not verifying the returns were submitted correctly, but I relied on the service and didn't think to double check. The whole point of using the service is to handle all the little details I don't understand. My bad. Of course, I'm also surprised the IRS didn't point out the error and reject the returns.

Unfortunately, now I need to figure out how to fix this mess. I don't even know where to start. Obviously I need to pay the taxes owed, but I assume I'll end up paying some kind of penalty too. That sucks.

Clearly, I'll be using a different tax service next year and scrutinize the return in more detail.

 

[ocean view]

I’m unclear from your post what the problem is. Can you elaborate? Did you receive an IRS notice?

 

[zinger1457]

Not sure I understand either, if you paid the estimated taxes to cover the conversion what's the issue? Did the tax prep service forget to list the income from the conversions?

 

[sengsational]

You should have received and reflected a 1099-R on your tax forms for those years. Are you saying you didn't get the 1099-R or that you got it and didn't put it on your tax forms? I'd be surprised if you never got a letter from the IRS with such a glaring error.

 

[mountainsoft]

I'm sorry I didn't explain better. I just discovered the problem today and am still trying to figure it out myself.

Basically, I did everything I was supposed to do on my end. I performed the Roth conversion at Vanguard, and paid estimated taxes for the conversion on the EFTPS web site.

I did receive a 1099-R form from Vanguard, and EZTaxReturn recorded the conversion as an IRA distribution on line 4a of the 1040 tax form, with "ROLLOVER" on line 4b. They initially said they supported conversions, I saw it listed on the tax return, so I didn't look any further.

Unfortunately, when I dug deeper today, I discovered the IRA distribution was not included in our income, and no taxes were paid on that money. I assume the estimated taxes I paid were simply returned as part of our tax refund for those years.

I only discovered this because I only have one more Roth conversion to do and I was curious if I could fit it in this year without going over our tax bracket. Instead I opened a can of worms I wasn't expecting.

So now I'm frustrated with EZTaxReturn, surprised IRS didn't catch it, and worried about the repercussions.

 

[sengsational]

Estimated taxes are neither here nor there; it's all about what was on the 1040 on line 4b (for 2020, 2019, and 2018).

If you have a 1099-R that's not reflected on that line, then it's no big deal...you create an amended return for each instance where you have a discrepancy.

As for the IRS not catching it, they sometimes take several years to catch things. I'd be surprised if they let something like that go without sending you a letter.

 

[RunningBum]

Don't be so quick to blame EZTaxReturn. 1099-R handles a lot of things, some taxable, some not. If you miss checking something like the IRA/SEP/SIMPLE box, or put the wrong code in box 7, it may come out as non-taxable.

The IRS doesn't go through and compare all of your 1099s with your return before accepting it. They can't know you did a conversion instead of something non-taxable until they do checks later, usually a couple years later.

That leaves you to blame.

I review my numbers to make sure they make sense. If I was missing my Roth conversion, I would certainly notice the lower income. Maybe your return is more complex and harder to see, but there is a separate line on 1040 for IRA distributions so you should notice it came out 0.

What to do? Go back and file 1040-X (amended return) for each year, making sure the conversion is included in income. It's not that hard, but I don't know if that tax program handles it. Pay the amount due, and let the IRS calculate the penalty, and pay that too. Chalk it up to experience. And pay a couple bucks extra for a better tax program.

 

[cathy63]

I would suggest you take all your returns and all the associated documents for each year to a tax prep storefront such as H&R Block. This is a fairly simple issue and any preparer should be able to review the returns and create amended returns to fix it. You don't need a CPA for this. Yes, there will be penalties and interest due on the late payments.

 

[RunningBum]

^^
That's a very good answer too.

 

[mountainsoft]

Don't be so quick to blame EZTaxReturn.

We have used them for years and had been quite happy with their service. What irritates me is that I specifically asked if they supported Roth conversions and they told me yes, only to turn around and tell me no once I discovered there was a problem.

That leaves you to blame.

Yep, I'm well aware it's ultimately my fault. I'm not blaming anyone else. I just didn't think to review what I thought was an automated process. Live and learn.

there is a separate line on 1040 for IRA distributions so you should notice it came out 0.

Hindsight and all that... It's obvious now, but I never thought to check before.

Go back and file 1040-X (amended return) for each year, making sure the conversion is included in income. It's not that hard, but I don't know if that tax program handles it. Pay the amount due, and let the IRS calculate the penalty, and pay that too.

That's my plan, though it looks like I'll have to do it old school on paper.

Thankfully, it looks like my first Roth conversion in 2018 was recorded as income, so I'll only have to amend the proper Form 8606. There shouldn't be any interest or penalties for that year.

2019 will take a bit more work, but I guess I'll figure it out and pay for my mistake.

If I can resolve 2020 before April 15, I should be able to avoid interest and penalties for that year too.

Unfortunately, I'll have to come up with several thousand dollars for the unpaid taxes now. We have it on hand so it's not the end of the world, but it's an unplanned expense never-the-less.

I'll know better for next year and will only have one more conversion after that.

 

[zinger1457]

We have used them for years and had been quite happy with their service. What irritates me is that I specifically asked if they supported Roth conversions and they told me yes, only to turn around and tell me no once I discovered there was a problem.

It doesn't sound reasonable to me that a tax preparer could claim after the fact that they don't support Roth conversions, I would expect any tax preparer to be able to handle that. They should have some liability in this if you provided them with all the correct documents including the 1099R's. Might be worth getting some legal advice before proceeding.

 

[Gumby]

Sorry this happened to you. I think the solution is as others have described - you'll need to file a 1040-X for each of the years where the conversion amount wasn't included in income. You can either do it yourself or get someone like H&R Block to do it.

Hearing stories like this just reinforces my decision to always do my own taxes and my own investing. No one else cares about my money as much as I do.

 

[JoeWras]

mountainsoft, I hope you get good resolution. This is solvable, although it may cost you a few bucks. I would move on from these folks, take the sunk cost, and either handle it yourself or get a tax preparer to do it.

I know it is retrospect, and I'm not piling on you, just letting others know. I took at look at this company's web site and their service doesn't look appropriate for most on this board since most of us wander into at least medium complex tax situations. For instance, they don't support form 8606-T, which is another IRA situation (IRAs with basis). So they support retirement income, but only "sort of."

They also explicitly say they don't support wash sales. So, they can support a 1099-B, but only "sort of." When I see this kind of support, it sends up red flags.

 

[Midpack]

I would suggest you take all your returns and all the associated documents for each year to a tax prep storefront such as H&R Block. This is a fairly simple issue and any preparer should be able to review the returns and create amended returns to fix it. You don't need a CPA for this. Yes, there will be penalties and interest due on the late payments.

+2, you want to get it right this time.

It doesn't sound reasonable to me that a tax preparer could claim after the fact that they don't support Roth conversions, I would expect any tax preparer to be able to handle that. They should have some liability in this if you provided them with all the correct documents including the 1099R's. Might be worth getting some legal advice before proceeding.

I don’t know about legal advice but your preparer is totally incompetent to leave an IRA distribution off as income, Roth conversion or not.

 

[RunningBum]

Thankfully, it looks like my first Roth conversion in 2018 was recorded as income, so I'll only have to amend the proper Form 8606. There shouldn't be any interest or penalties for that year.

This tells me you entered it correctly for 2018, but not 2019 or 2020. I did a quick run with nothing but a $30K rollover, entering a 1099-R with $30,000 on lines 1 & 2a, 2b checked, line 7 with code 2, and IRA/SEP/SIMPLE checked. My tax due was $1918. It doesn't show my return forms, or is shows it after I pay $29 which I'm not doing, so I can't say for sure it was recorded in the right place on 1040, but I'd think it would be.

EDIT: Maybe not. I don't see form 8606 listed among supported forms. I don't see a way to see my forms unless I pay their fee, so I don't know how they got my $30K income onto the 1040.

 

[pb4uski]

I agree with the advice to just file 1040Xs to amend your returns and pay the tax. Sounds like at a minimum that 2019 will require a 1040X.

Then dump EZTaxReturn and buy TurboTax going forward and do it yourself.

 

[SecondCor521]

That's my plan, though it looks like I'll have to do it old school on paper.

Thankfully, it looks like my first Roth conversion in 2018 was recorded as income, so I'll only have to amend the proper Form 8606. There shouldn't be any interest or penalties for that year.

2019 will take a bit more work, but I guess I'll figure it out and pay for my mistake.

If I can resolve 2020 before April 15, I should be able to avoid interest and penalties for that year too.

A few minor things that may be helpful:

If the only thing wrong with your 2018 tax return was a missing Form 8606, then you may simply file the Form 8606 by itself. You would not need to file a 1040-X. Put your name / address / SSN at the top of the Form 8606, fill it out (probably Part II since you're talking about Roth conversions), sign it at the bottom, then mail it by itself to the correct address. In theory the IRS can fine you $50 for not filing it, but they probably won't.

If your original 2019 return was e-filed, then you have the option of e-filing your 2019 amended return. This is a new feature this year and is something the IRS hopes to expand further.

If you haven't filed your 2020 return yet, then yes, you have until April 15th to do so. You may face underpayment penalties but often there are safe harbors that will let you avoid them.

 

[mountainsoft]

I would move on from these folks, take the sunk cost, and either handle it yourself or get a tax preparer to do it.

Yep, I'm planning to find another tax service next year. I made the mistake of just assuming they were the "experts" and relied on their advice regarding the Roth conversions. I guess I didn't know enough to know what I was overlooking.

I ran into a similar issue with them a couple years ago when I tried to use them for my mom's tax return. They didn't support forms from the Railroad Retirement Board, so I had to use a different service for her return. I should have acknowledged that as a red flag, but since we've used them successfully for years I thought it was just a rare situation.

It will take a bit of hands on work, and a short term financial hit, but I will get it resolved. At least I know now what to look for so I'm better prepared moving forward.

 

[mountainsoft]

If the only thing wrong with your 2018 tax return was a missing Form 8606, then you may simply file the Form 8606 by itself.

I spoke too soon. I started the 1040-X last night for 2018 and do owe taxes for that conversion too. 2018 was that screwy "post card" tax return with lots of attached schedules, and I initially thought the "add lines 1-5" included the Roth conversion, but it was actually self employment income from one of the other schedules.

If your original 2019 return was e-filed, then you have the option of e-filing your 2019 amended return.

Alas, EZTaxReturn doesn't support this for previous year returns. I asked.

I'll just do it by hand like we always used to do. It will be a good learning experience to study the forms better. After filling out the first forms last night, it's not as complicated as I initially thought.

If you haven't filed your 2020 return yet, then yes, you have until April 15th to do so.

We already filed for 2020, but the 1040-X instructions explicitly say not to file it until the return is processed. So, I'll have to wait until the 2020 return is done. It should be easy to resolve it before April 15th.

 

[mountainsoft]

EDIT: Maybe not. I don't see form 8606 listed among supported forms. I don't see a way to see my forms unless I pay their fee, so I don't know how they got my $30K income onto the 1040.

Nope, they don't support the 8606 (didn't know that previously). They do show my Roth conversion on line 4A of the 1040 form as an IRA distribution, but none of it is marked as taxable on 4b.

 

[mountainsoft]

Sorry this happened to you. I think the solution is as others have described - you'll need to file a 1040-X for each of the years where the conversion amount wasn't included in income. You can either do it yourself or get someone like H&R Block to do it.

I already got in trouble relying on a third party. I'll file the 1040-X and 8606 forms myself to ensure they are done correctly this time.

 

[FREE866]

This tells me you entered it correctly for 2018, but not 2019 or 2020. I did a quick run with nothing but a $30K rollover, entering a 1099-R with $30,000 on lines 1 & 2a, 2b checked, line 7 with code 2, and IRA/SEP/SIMPLE checked. My tax due was $1918. It doesn't show my return forms, or is shows it after I pay $29 which I'm not doing, so I can't say for sure it was recorded in the right place on 1040, but I'd think it would be.

EDIT: Maybe not. I don't see form 8606 listed among supported forms. I don't see a way to see my forms unless I pay their fee, so I don't know how they got my $30K income onto the 1040.

Question. On my 1099R in Box 7 labeled "distribution code" there is the number 2 and the IRS box is checked. When I look further down under "instructions for the recipient" the box 7 explanation indicates that the 2 is "early distribution , exception applies-under age 59 1/2"
Does this form know that I rolled the money into a Roth? and if so, how does it know that? thank you

 

[RunningBum]

Question. On my 1099R in Box 7 labeled "distribution code" there is the number 2 and the IRS box is checked. When I look further down under "instructions for the recipient" the box 7 explanation indicates that the 2 is "early distribution , exception applies-under age 59 1/2"
Does this form know that I rolled the money into a Roth? and if so, how does it know that? thank you

I found this at https://twonline-20.taxwise.com/Hel...Miscellaneous_Codes/1099R_Codes_for_Box_7.htm

[FONT=&quot]Use Code 2 only if the participant has not reached age 591/2 and you know the distribution is the following.[/FONT]

• A Roth IRA conversion (an IRA converted to a Roth IRA).
• A distribution made from a qualified retirement plan or IRA because of an IRS levy under section 6331.
• A governmental section 457(b) plan distribution that is not subject to the additional 10% tax. But see Governmental section 457(b) plans, in the IRS instructions, for information on distributions that may be subject to the 10% additional tax.
• A distribution from a qualified retirement plan after separation from service in or after the year the participant has reached age 55.
• A distribution from a governmental defined benefit plan to a public safety employee (as defined in section 72(t)(10)(B)) after separation from service, in or after the year the employee has reached age 50.
• A distribution that is part of a series of substantially equal periodic payments as described in section 72(q), (t), (u), or (v).
• A distribution that is a permissible withdrawal under an eligible automatic contribution arrangement (EACA).
• Any other distribution subject to an exception under section 72(q), (t), (u), or (v) that is not required to be reported using Code 1, 3, or 4.

So it's either a Roth conversion or some other taxable event that is allowed (not penalized) and taxable.

Turbo Tax goes on to ask what you did with the money, one of the options being converting some or all of the money to a Roth IRA, and then they ask how much. This is how they fill out form 8606 for you.

 

[FREE866]

I found this at https://twonline-20.taxwise.com/Hel...Miscellaneous_Codes/1099R_Codes_for_Box_7.htm

So it's either a Roth conversion or some other taxable event that is allowed (not penalized) and taxable.

Turbo Tax goes on to ask what you did with the money, one of the options being converting some or all of the money to a Roth IRA, and then they ask how much. This is how they fill out form 8606 for you.

Thank you very much. Just realized the IRA is at Schwab and the Roth IRA is also at Schwab so thats probably how they "know" its a conversion.

 

[cathy63]

Question. On my 1099R in Box 7 labeled "distribution code" there is the number 2 and the IRS box is checked. When I look further down under "instructions for the recipient" the box 7 explanation indicates that the 2 is "early distribution , exception applies-under age 59 1/2"
Does this form know that I rolled the money into a Roth? and if so, how does it know that? thank you

(The "IRA/SEP/Simple" box is checked, not the "IRS" box.)

No, the 1099-R doesn't indicate that the money was converted to a Roth IRA. You have to tell the IRS that when you file your return by including form 8606. For a conversion, you will fill out Part II.