Strange IRS audit letter

[braumeister]

Received a weird audit letter from the IRS about my 2016 tax return.

We converted some Trad IRA money to Roth, and then recharacterized part of it back, all in that year. Our return was correct, with the 1040 and 8606 showing the right amount of the net conversion.

Yet the audit letter is claiming that the recharacterized amount should have been included in taxable income and now they want the unpaid tax and interest on that amount.

The strange part is that even the detailed information in the audit letter acknowledges that the 1099 for the recharacterization showed Code N in Box 7, which is a recharacterization.

I'm not concerned, and will reply with the details, but it looks as if their computer simply had a hiccup when it processed the return.

Could I be missing something?

 

[RunningBum]

I got dinged for the same thing, in June, for 2016, right down to the detail of it being a partial recharacterization.

Did you include a "Recharacterization Explanation" on your return? When I recharacterized and filed with Turbo Tax one year, it prompted me for this and I had no issue. For 2016, I used H&R Block and it never prompted me for this, and I got the audit letter. Best I can tell, this is the only difference between the two.

I sent a reply back explaining this--detailing the original conversion and the later recharacterization, and also omitting the explanation, blaming the tax program. I included the relevant Vanguard transactions.

A couple weeks ago I got another letter saying that they are still looking into this and have not made a ruling, but suggested that if I owe taxes I should pay to avoid penalty and interest. Of course I don't think I owe anything more so I ignored that second letter.

If you find anything more, please update, and I'll do the same. I think you're right that it's a glitch in their system, perhaps because I missed adding the explanation.

 

[sengsational]

Mine wasn't with a Roth conversion, but with a 1040X. But similar in that their calculations didn't agree with themselves. So I called and said if these things are true that are properly reflected in this notice, then I should owe zero, and the rep said "yes" and said to write a letter, which I did. I got a letter back saying it might take 45 days to process. Then I kept getting that original notice, over and over, which I ignored for a while. Then I wrote another letter and got another 45 day thing, Still kept getting a repeat of the original. It was almost a year before I got a notice that I owed zero (they backed out the base and the fees and interest that had been accumulating).

 

[JoeWras]

Ugh. August. Seems like they always send out these letters about now. I only got one many years ago (wrong SSN mix up) and it was right around Sept. 1.

Good luck.

 

[kaneohe]

.......................
Did you include a "Recharacterization Explanation" on your return? ....................................

Wondering the same thing..........I know that Alan S. at fairmark.com and now at bogleheads.org always recommends the narrative explanation. The instructions for recharacterization (F8606)also say the same thing:

"You converted an amount from a traditional, ...... IRA to a Roth IRA in 2017 and later recharacterized all or part of the amount in a trustee-to-trustee transfer to a traditional, ..... IRA. If you recharacterized only part of the amount converted, report the amount not recharacterized on Form 8606, Part II. If you recharacterized the entire amount converted, don’t report the conversion on Form 8606. In either case, attach a statement to your return explaining the recharacterization and include the amount converted (whether or not recharacterized) in the total on Form 1040, line 15a

I don't really know how those codes work but it seems that they might use the same code for reporting recharacterizations of both conversions and contributions?
Tax consequences might be different for the same 1099R?
Perhaps a close look at the 1040 and the F8606 might tell the story but perhaps not or maybe there's not enough time for a close look.............so maybe that's why the narrative explanation is suggested to clarify exactly what happened.

 

[braumeister]

Yes, that's part of what makes it strange.
I used TurboTax, and the explanatory statement was included, along with "STMT" typed in next to line 15 on the 1040. I had all bases covered, but the IRS computer just didn't process it correctly IMO.

I'll report the outcome, but that will probably be a long time from now.

 

[braumeister]

I don't really know how those codes work but it seems that they might use the same code for reporting recharacterizations of both conversions and contributions?

No, code N is only used for recharacterizations made in the same year.

 

[Souschef]

In a lot of cases, it is a function of computer matching. I did a QCD from a brokerage account that was the only transaction. I got a 1099 from the broker, and entered into TT. The IRS computer added up all the 1099's and found the exact amount was the same as the one 1099. I was told I did not report it, etc.
I sent the IRS a letter explaining the situation, along with page 1 of my 1040 showing the QCD. the data entry page of the 1099, and the 1099 summary showing the QCD.
That apparently solved the problem.

 

[kaneohe]

No, code N is only used for recharacterizations made in the same year.

not quite what I said.........is code N used for both recharacterizations of conversions and recharacterizations of contributions?

 

[RunningBum]

I got dinged for the same thing, in June, for 2016, right down to the detail of it being a partial recharacterization.

Did you include a "Recharacterization Explanation" on your return? When I recharacterized and filed with Turbo Tax one year, it prompted me for this and I had no issue. For 2016, I used H&R Block and it never prompted me for this, and I got the audit letter. Best I can tell, this is the only difference between the two.

I sent a reply back explaining this--detailing the original conversion and the later recharacterization, and also omitting the explanation, blaming the tax program. I included the relevant Vanguard transactions.

A couple weeks ago I got another letter saying that they are still looking into this and have not made a ruling, but suggested that if I owe taxes I should pay to avoid penalty and interest. Of course I don't think I owe anything more so I ignored that second letter.

If you find anything more, please update, and I'll do the same. I think you're right that it's a glitch in their system, perhaps because I missed adding the explanation.

I got another letter today. They said the information I provided resolved the tax issue in question, and the inquiry is now closed. I owe nothing.

 

[frayne]

Went through a similar problem with a 72T years ago. After sending in all the documentation along with a letter of explanation, the IRS agreed there was no issue.