Ruh-roh: Roth IRA conversions-- the IRS way.


Moderator Emeritus
Dec 11, 2002
The letter says "Apologies, love, hugs, & kisses from your kinder, gentler Internal Revenue Service."

I wish. It actually says "Your income & payment info that we have on file does not match the entries on your 2004 Form 1040."

That's right-- not the tax year we just finished, but the tax year before that. It must be a coincidence that it took the IRS computer over a year to decipher our cryptic message hidden between the lines of Forms 1040 & 8606. We filed electronically but it's almost as if TurboTax didn't give the IRS both pages of 8606.

In Nov 2004 I converted $35,031 of my traditional IRA to a Roth. This was painstakingly calculated against our income & deductions to take us to the top of the 15% tax bracket. The conversion plugs through Form 8606 to determine that the basis in my traditional IRA knocks down the taxable portion of the conversion to $26,062. (I made over a decade of non-deductible traditional IRA contributions.) Line 15a of 1040 says "IRA distributions-- $35,031." Line 15b says "Taxable amount (see instructions)-- $26,062."

I checked our 1099-R from Fidelity-- $35,030.56 with block 7 distribution code "2", which decrypts to "Early distribution, exception applies (under age 59½)." That appears to be the correct code. TurboTax filled out Form 8606 with what appears to be the correct instructions and math.

The last time we had a problem with a tax return we wrote a letter. My plagiarized update for this issue would read:
"As discussed on (date) with (name) at your 1-800-###-#### phone line, we've enclosed a copy of our 2004 Form 8606. This should have been received by the IRS in March 2005 when we submitted our electronic filing for tax year 2004.
Our Form 8606 shows that the IRA conversion amount is correct and that no penalty is due. We ask that you abate your request to pay a penalty, and we’d appreciate your written confirmation that no penalty is due."

Before I get on the phone with the IRS' Customer "Service" staff, I'm wondering about a couple questions for you enrolled agents & audit experts:
- Is it possible that TurboTax screwed up the electronic filing and didn't provide page 2 of Form 8606 to the IRS?
- Or is it possible that TurboTax filed correctly and the IRS screwed up their computer-matching process?
- Besides our paper copy of 8606, is there anything else I should be submitting?
- Are there any other key words or tricky phrases I should use in our letter?
- How long will this go on? Last month we filed spouse's partial IRA conversion for tax year 2005. Is there any way to get the IRS to understand that we'll be doing this for a few more years, or are we going to exchange annual form-letter gunfire for the rest of the decade?
- As a result of this letter and our response, will I be upgraded to a personal appearance with Vinnie the Auditor?

Any semblance of this situation to the movie "V for Vendetta" is entirely coincidental.

It's interesting to note that the IRS' eight-page form letter has many paragraphs about payment options-- partial payments, payment plans, and even bankruptcies. However I couldn't find the block to check that says "The IRS computer is wrong, here's why, and we don't owe the feds any more money." You'd think that the effort to generate & mail this letter is a waste of taxpayer money, but I guess if even one blissfully ignorant taxpayer is intimidated into overpaying their taxes then the entire project is worth it!
I've been audited a couple of times.  My experiences have been that calling on the telephone will not get you anywhere.  The IRS's first letter will just state that your taxes were calculated incorrectly and you owe more money. There will be no reason why or which figures are incorrect.  After a couple of weeks wait they will send an additional letter detailing their position and the specifics of why you owe more.  At that point you can support your position (or tuck your tail between your legs) and respond to their letter by mail.  In every case, the issues were resolved correctly and explained correctly by the agent responding to my letter.  In one case they even filed the ammended return for me.   In my cases they were usually 3 years behind in the audit, and be prepared for the state to audit you as well.  In California the state gets notification by the feds of who is audited and why and they (the state) automatically will follow with an audit, no matter what the result was with the feds. 
I got "the letter" telling me that I owed capital gains taxes on all of my money market transactions for 2004. They said I had two weeks to file the return or they would send me a tax bill for 100% of the redemptions reported by my brokerage account.

I sent back a letter telling them that money markets buy for $1 per share and sell for $1 per share unless something terrible happens and then it's a loss. I was about to tell them it's no different then my money market checking account but I didn't want to give them any more ideas.

I've not heard anything for a few weeks. Hopefully, there is at least one person there that isn't an idiot.

I have been thinking about exactly the same thing (the conversion, not the audit :'( ). I will be interested in the outcome of your joust with Uncle Sam.

Hum. So which computer made the mistake?

You might post your question to the Fairmark board.
Martha said:
You might post your question to the Fairmark board. 
Thanks, good idea. I see some names from Ed Slott's board there too.
Tax year 2005. Katrina loss, fair sized Roth Conversion.

Nords - take good notes - I may be getting back to you in future.

I hope the IRS loves me.

heh heh heh heh heh
Don't let Nord's experience put you off conversion to Roth IRAs. He only had an issue because part of his IRA was post tax dollars. Not many people contribute post tax to IRAs.

And he did everything right so it is all going to work out anyway. :)
Martha said:
And he did everything right so it is all going to work out anyway.  :)
On form 8606, anyway!

I'd hate for this issue to be used as an IRS excuse to poke into our Schedule E rental property deductions or our Schedule D investment expenses or our 2% miscellaneous deductions or our charitable deductions or...
Martha said:
Don't let Nord's experience put you off conversion to Roth IRAs.  He only had an issue because part of his IRA was post tax dollars.  Not many people contribute post tax to IRAs.

And he did everything right so it is all going to work out anyway.  :)

Actually, if you make too much money and want to contribute to an IRA (which is almost always a good thing to do), your only choice is to use after-tax dollars.  I've "Rothified" my Traditional IRA many times over the years (since it was first allowed in 1998) and have had no problems doing so.  The 8606 form defined my basis (I have to contribute to the Traditional IRA first with after-tax dollars and then if my income turns out to be low enough for the year, I can "Rothify" just before the end of the year.  Otherwise, I have to wait until the following year to determine if my income for that year is low enough so that I'm eligible to "Rothify" in that year.

It's been my experience that when I've gotten letters from the IRS or the State of California FTB, either the agencies were right (i.e., I screwed up somehow and just paid the extra tax, penalties, and interest that were due) or sometimes the agency screwed up.

I once got a letter from the FTB saying I owed another $40 in tax because I understated my salary income on my return.  It turned out that an FTB employee swapped a couple of digits when they hand-entered the information from the W-2 form my employer mailed to them.  Once they verified the original information, the problem was resolved.
Re: All's well that ends well...

The IRS sent us another very nice form letter: "CLOSING NOTICE: Thank you for providing us with additional information about the issue we recently wrote to you about. We are pleased to tell you that, with your help, we were able to clear up the differences between your records and your payers' records. If you sent us a payment based on our propsed changes, we will refund it to you if you owe no other taxes or have no other debts the law requires us to collect. [Two more paragraphs of blah blah blah.] Thank you for your cooperation."

The letter is so generic, and unsigned, that I suspect it was written by the same computer that sent us the first letter. (I wonder if it'd pass a bureaucrat's version of the Turing test?) So as pleased as we all are with each other, I guess it wouldn't do any good to respond with the comment "Thanks, if you'd bothered to read our tax return then you wouldn't have had to write any letters and we wouldn't have to waste our time explaining it to you!!" Ah well, at least this whole affair was only about six weeks.

Fishing expedition. I wonder how many people succumb to the intimidation and pay up instead of paying a CPA or trying to figure it out.

Well, that wraps up tax year 2004. I wonder how long it'll take us to get an IRS letter for the return we just submitted?
Re: All's well that ends well...

Nords said:
The letter is so generic, and unsigned, that I suspect it was written by the same computer that sent us the first letter.

years ago, when I was in grad school and my ex was working she made more money than I did. So I put here first on the tax return, and me as the spouse (seemed fair at the time). She had kept her maiden name.

I got a letter from the IRS informing me that my social security number did not match up with a person with (my first name) (my middle initial) (her last name). Obviously, their computer software made some bogus assumptions.

I wrote them a sarcastic letter saying something to the effect that I was glad that a person of that name wasn't sharing my social security number with me, and to please check the assumptions their software was making.

never heard another word.
Just a word...

Not a good idea to get snippy with the IRS. They are authorized to fine you$500 just because they don't like your face. :'(

Ed_The_Gypsy said:
Not a good idea to get snippy with the IRS.  They are authorized to fine you$500 just because they don't like your face. :'(
Never been convicted by computer before!

I'm pretty sure that none of their correspondence was touched by human hands, and I'm not that sure that any eyeballs actually looked at ours!
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