Roth IRA tax help needed!

[smokin_poke85]

Hello, I had a quick IRA question I have been tirelessly trying to get an answer to, with ZERO success from anywhere. My wife started a Roth IRA a couple years before we were married. When we got married in 2010, our AGI went over the phase out range to be able to directly contribute to a Roth. The problem is that neither one of us knew that we needed to start using the backdoor conversion method and contributions were made directly. I didn’t know it was an issue until a few months ago when I opened my own IRA. I know I just need to recharacterize her 2015 contributions over to a Traditional then convert it back, but how do I fix her 2010-14 direct Roth contributions that should have been back-doored instead, since those deadlines have passed now? The IRS has never said anything about improper method on our taxes.

Should I just fix 2015 and go on? Do I need to do anything with 2010-14 contributions? I just don’t want them to hit me with some big penalty down the road.

 

[2017ish]

this looks to be on point (and the site typically is reliable). Excess Contributions to Roth IRAs - Fairmark.com Fairmark.com

I'd also go to the IRS publications on this if I were you. Not going to be painless with that 6% per annum penalty, but the sooner fixed the better.

 

[kaneohe]

Agree w/ 2017ish. You can also post in the retirement sub-forum there and
watch for an Alan S. response if you have more specific questions.

 

[sengsational]

How does the IRS know that you've over-contributed? Just curious. I put money in a Roth and don't remember putting that down on my tax forms anywhere, did I? Taking money out, the fiduciary company would probably do a report back to the IRS if the account was less than 5 years old, but that company wouldn't know how much money you made in the year of the contribution, so couldn't tattle. Not suggesting you ignore it because 6% per year is pretty painful, and apparently it can even go beyond the amount you put in. Scary.

 

[harley]

How does the IRS know that you've over-contributed? Just curious. I put money in a Roth and don't remember putting that down on my tax forms anywhere, did I? Taking money out, the fiduciary company would probably do a report back to the IRS if the account was less than 5 years old, but that company wouldn't know how much money you made in the year of the contribution, so couldn't tattle. Not suggesting you ignore it because 6% per year is pretty painful, and apparently it can even go beyond the amount you put in. Scary.

Actually, there is a line on the 1040 that asks if you've contributed to a Roth or tIRA. I'm not sure it would be used to track this situation or not, but it seems like there must be a mechanism, otherwise everyone (or at least [-]I[/-] some people) would be pumping a bunch of money into Roths every year and letting it grow tax free.

 

[hnzw_rui]

How does the IRS know that you've over-contributed? Just curious. I put money in a Roth and don't remember putting that down on my tax forms anywhere, did I? Taking money out, the fiduciary company would probably do a report back to the IRS if the account was less than 5 years old, but that company wouldn't know how much money you made in the year of the contribution, so couldn't tattle. Not suggesting you ignore it because 6% per year is pretty painful, and apparently it can even go beyond the amount you put in. Scary.

IRA custodians submit Form 5498 to the IRS every year reporting how much you contributed.

 

[sengsational]

IRA custodians submit Form 5498 to the IRS every year reporting how much you contributed.

You're right. I wonder why the IRS didn't alert the OP to the problem. When will the IRS "realize" the problem? Only in an audit? I don't expect you to have the answers...just rhetorical questions.

 

[sengsational]

The IRS has never said anything about improper method on our taxes.

That's because Roth contributions (as opposed to Roth conversions) don't go on your tax forms. Did you use any kind of tax software or did you do it "by hand". I would expect that the tax software would alert you to the problem right then and there. But that's water under the bridge now.

I read the instructions for form 5329 and I'm not sure what the correct path would be starting from this point. What you were supposed to do on your 2010 taxes is report the over-contribution and pay a 6% penalty. That would have started a chain of 5329 forms every year. For each subsequent year's taxes, the previous year's 5329 overage goes into the current 5329. I suppose you could do amended return but generally, you must file Form 1040X within three years from the date you filed your original return or within two years from the date you paid the tax, whichever is later, so you would never be able to file "properly" because the oldest tax year where you had an over contribution is too old to file an amended return, so the value from the 5329 to carry forward can't possibly exist (as a reported figure, anyway). You could run through the calculations and do amended returns for as many years as you can, though. I'd get a tax attorney if I were you.

 

[smokin_poke85]

Below is what someone posted on the same question I posted on IRAhelp.com. What I am wondering is if they would wave the fees through a 5329 since I am trying to get it straightened out "in good faith" since they didn't notice our AGI was over the limit and see the Roth contributions. Luckily, she was only putting $1200/yr in it. Our taxes are done by an accountant down the street. He never asked if we made IRA contributions, and we didn't know we needed to tell him. If he had asked, we could have caught this a long time ago and vice versa. He hasn't been any help on trying to get this fixed. Doesn't seem knowledgeable on the subject although he has done taxes for years, and kept saying the custodian should take care of it all. They say they can only do what I tell them, and that he needs to tell me what needs to be done with previous years. They cannot give tax advice on passed years. Round and round I go. Needless to say, I am done with him after this. (IRAhelp.com answer below)


You are correct regarding recharacterizing her 2015 Roth contribution as a non deductible TIRA contribution, and you can then convert it back to the Roth. Or if the contribution has a significant loss you could request a return of the excess contribution and then make a new non deductible TIRA contribution in the full amount of 5500.
For the prior years, the exact amount of all her contributions should be distributed. This will not be taxable since they are Roth contributions, and any earnings get to remain in the Roth. The main problem is the 6% excise tax for each year which would be reported on a 1040X and 5329 starting with the oldes year. This could be expensive since the prior year excess carries over to the next year. Using an artibrary 5000 for 2010, this would start at 5000, go to 10,000 for 2011, 15,000 for 2012, 20,000 for 2013, 25,000 for 2014 and another 25,000 for 2015. Total of 100,000 @ 6% is 6,000. In addition, the IRS could bill late interest for late payment of the 2010-2014 excise taxes. There is no statute of limitations for excess contributions either, but it would have been nice had the IRS or any tax software program used to complete your return flagged this early on to eliminate this accumulated total.
Since the excise tax accrues on Jan 1, there is no rush to remove her balance before December so might as well let it generate some more Roth earnings for several months before taking out the distribution. But the 1040 X forms should and can be filed earlier to eliminate more possible interest charges. The distribution will be reported on an 8606 for 2016, but unless she has taken withdrawals already, there will be no tax due on the actual distributions.

 

[gauss]

A couple of thoughts regarding this:

Recall the general 3 year limit from time return filed/due (the later) to audit a return. This may help you with the older returns.

I would consider stopping to make any future Roth or traditional IRA contributions until the cumulative excess contributions have been worked off.

I would run your case by the experts over at fairmark.com

You may wish to consult with an Enrolled Agent or a CPA who practices before the IRS to seek professional advice on your options.

-gauss

 

[pb4uski]

+1 Go to see a CPA tax practitioner to advise you how to resolve the issue and either help you with the forms or do the forms. I don't think this is an area to try to sort out on your own... plus they will have a good idea as to any difference between that the regs say and what the IRS would be willing to accept.

 

[bingybear]

I'm curious how you missed it. Are you using a tax program, if so which one. Most I've seen go thru the roth worksheet in one format or another.
I once had an over contribution in a 401k when on an expat assignment... company screw up. I had to withdraw the over contribution + earnings associated with it ... and pay a penalty on the over contribution.
Get a good cpa or enrolled agent and get the mess straitened out.

good luck

 

[smokin_poke85]

Roth

I'm curious how you missed it. Are you using a tax program, if so which one. Most I've seen go thru the roth worksheet in one format or another.
I once had an over contribution in a 401k when on an expat assignment... company screw up. I had to withdraw the over contribution + earnings associated with it ... and pay a penalty on the over contribution.
Get a good cpa or enrolled agent and get the mess straitened out.

good luck

A local Tax accountant prepares ours. My wife had been using him before we got married, then we just continued using him. She had never told him she contributed to a Roth (she is the farthest thing from investment savvy), but it didn't matter at that time because she wasn't over the limit by herself. Once we married, it pushed us over the limit and we were oblivious that was even an issue until I found out about it when opening my own IRA a few months back. I'm waiting on a call back from a recommended local H&R Block professional to see if he can help me straighten it out.

 

[bingybear]

I would have thought that a tax accountant would either have a question about IRA contributions on the paper work you sent to him or a note returned with the filled out taxes that you could not contribute if your income was over the limit.
This is really one of the reason to either fill out your own taxes or work on a basic understanding of the typical rules. It will also give some understanding of ways to invest with the effect of taxes in mind.
good luck sorting this out

 

[Buckeye]

A local Tax accountant prepares ours. My wife had been using him before we got married, then we just continued using him. She had never told him she contributed to a Roth (she is the farthest thing from investment savvy), but it didn't matter at that time because she wasn't over the limit by herself. Once we married, it pushed us over the limit and we were oblivious that was even an issue until I found out about it when opening my own IRA a few months back. I'm waiting on a call back from a recommended local H&R Block professional to see if he can help me straighten it out.

If you use Block, make sure the person is an Enrolled Agent (EA). The storefronts used to take care of the normal stuff. There used to be a more high-powered back office group that handled much more complicated stuff like this. Be careful about using someone in a storefront unless they are an EA. I think it's unusual for an EA to be in a storefront but I have worked with them there when I did Block as a winter diversion years ago.

 

[smokin_poke85]

IRA

If you use Block, make sure the person is an Enrolled Agent (EA). The storefronts used to take care of the normal stuff. There used to be a more high-powered back office group that handled much more complicated stuff like this. Be careful about using someone in a storefront unless they are an EA. I think it's unusual for an EA to be in a storefront but I have worked with them there when I did Block as a winter diversion years ago.

I looked up the agent I was referred to on H&R Block site, and he is an Enrolled Agent. The lady who gave the referral from a different office, said that he is more involved with the complicated issues and goes to the IRS audits, etc. Hopefully he will have some answers for me and can get this lined out. I'm honestly just tired of dealing with it. This just makes me want to bury my money in the backyard haha

 

[Buckeye]

I looked up the agent I was referred to on H&R Block site, and he is an Enrolled Agent. The lady who gave the referral from a different office, said that he is more involved with the complicated issues and goes to the IRS audits, etc. Hopefully he will have some answers for me and can get this lined out. I'm honestly just tired of dealing with it. This just makes me want to bury my money in the backyard haha

Your current tax accountant needs to pay up. I'm sure he carries Errors and Omissions insurance but the only way to access the insurance is to sue him. Small claims court? Hopefully, you are under the amount that's allowed by small claims!

 

[target2019]

Tax preparer will say the question was asked. When you reviewed the tax forms and signed, it is your responsibility now.

 

[Buckeye]

Tax preparer will say the question was asked. When you reviewed the tax forms and signed, it is your responsibility now.

Yes, I'm sure that's what the accountant will claim. If he can pull the annual questionaire out of his files as proof, then case closed. If there is no proof the question was asked, let the judge decide!

Why would E&O insurance exist if the client is always 100% responsible after signing the return?

 

[smokin_poke85]

Yes, I'm sure that's what the accountant will claim. If he can pull the annual questionaire out of his files as proof, then case closed. If there is no proof the question was asked, let the judge decide!

Why would E&O insurance exist if the client is always 100% responsible after signing the return?

We have never received an annual questionnaire (is that out of the norm? this is the only tax guy I've used. Appointments can be made with him, but never thought it was needed. It's just been the process of giving his front desk all of my paperwork and including a sticky note of anything I want to inform him of. Then he calls if there is a question. Court case would probably just be a he said he said, but he does not have proof he ever asked. I don't think I am looking at a whole bunch of money in fees. With a 3 mo old, it's tough to find time to do anything. I'm sure the wife would rather just pay it up and be done with it. I know I will be making an appmt every year with whoever I use from now on.

 

[target2019]

Yes, I'm sure that's what the accountant will claim. If he can pull the annual questionaire out of his files as proof, then case closed. If there is no proof the question was asked, let the judge decide!



Why would E&O insurance exist if the client is always 100% responsible after signing the return?

Two separate issues. Insurance protects the preparer. Your covenant with IRS is another thing.

This us why younger folks should start doing their taxes. Why get involved with paying for it, when you are responsible and must sign?

 

[Buckeye]

We have never received an annual questionnaire (is that out of the norm? this is the only tax guy I've used. Appointments can be made with him, but never thought it was needed. It's just been the process of giving his front desk all of my paperwork and including a sticky note of anything I want to inform him of. Then he calls if there is a question. Court case would probably just be a he said he said, but he does not have proof he ever asked. I don't think I am looking at a whole bunch of money in fees. With a 3 mo old, it's tough to find time to do anything. I'm sure the wife would rather just pay it up and be done with it. I know I will be making an appmt every year with whoever I use from now on.

Your situation is exactly why a structured questionaire is reguired. I'm sure the tax program he uses to input your information and e-file your return asks him whether you have contributed to Traditional or Roth IRA's.

Every tax program on the market sends you through a structured interview so nothing gets missed. Buy one of the tax programs (I love TaxAct but many others like TurboTax) and walk through the process/interview even if you don't use it to submit your taxes. It's quite simple unless you have a business or rental properties. Even then, the software will take you through the forms.

 

[Buckeye]

Two separate issues. Insurance protects the preparer. Your covenant with IRS is another thing.

This us why younger folks should start doing their taxes. Why get involved with paying for it, when you are responsible and must sign?

Yes, I agree the taxpayer has to pay whatever is owed the IRS no matter who is at fault. After everything is paid, I would look to recover any penalties and interest I incurred due to the preparer's sloppy work.

 

[2017ish]

...
Every tax program on the market sends you through a structured interview so nothing gets missed. Buy one of the tax programs (I love TaxAct but many others like TurboTax) and walk through the process/interview even if you don't use it to submit your taxes. It's quite simple unless you have a business or rental properties. Even then, the software will take you through the forms.

Putting myself at risk of being characterized as an old codger, I would go so far as to recommend doing an educational run of one year's return with a pencil and paper (maybe before turning to a program for filing for that year). If you don't have a good working knowledge of the Code and Regs pertinent to your situation, the software packages are a bit of a black box--and I'm guessing particularly so if you do the so-called "interview" mode.

I recently had a similar conversation with late-20s Son and his S.O., both talented at math even for S.V. engineers. They did not understand standard deductions and how that played with itemized deductions; always just did the software. (Now, they are investigating implications of MFJ for two high CA incomes--fun times!)

OK, you can play on my lawn now.

 

[sengsational]

Our taxes are done by an accountant down the street. He never asked if we made IRA contributions, and we didn't know we needed to tell him. If he had asked, we could have caught this a long time ago and vice versa. He hasn't been any help on trying to get this fixed.

Your current tax accountant needs to pay up. I'm sure he carries Errors and Omissions insurance but the only way to access the insurance is to sue him. Small claims court? Hopefully, you are under the amount that's allowed by small claims!

The OP wouldn't have to sue for all years if it was over the small claims amount in his location. Just an idea.

Tax preparer will say the question was asked. When you reviewed the tax forms and signed, it is your responsibility now.

The accountant is supposed to be the expert, so I'm not sure that a case would be thrown-out because the OP signed-off on the end product.

If you were a hands-off tax couple and did the "shoe box" thing, where you dump a shoe box full of forms off at the tax preparation office, then most likely you included the 5498 form from yours and your wife's custodian. If you have any proof at all that you did that, then you stand a good chance to win in your small claim.

Do you have any records of what information/paperwork you supplied to the accountant for the problem tax years?