Author Topic: IRS Problems with IRA Re-Characterization  (Read 2133 times)

Mississippi Mudstache

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IRS Problems with IRA Re-Characterization
« on: October 29, 2016, 03:59:08 PM »
In 2014, I contributed $5500 to a Roth IRA. I ended up earning more than I anticipated that year, so in March 2015, I re-characterized the Roth contribution as a traditional IRA contribution, and filed my taxes accordingly (deducting the $5500 contribution from my gross income). I noted the re-characterization with a letter in my tax file as recommended by Fidelity.

For the last several months, the IRS has been sending me letters telling me that I owe $1000+ in taxes because I tried to deduct a Roth IRA. I have explained multiple time, with letters from Fidelity confirming that everything was re-characterized correctly, with the updated 1099s - everything that proves that the contribution was re-characterized as a traditional IRA and therefore deductible. Every time they write me back the same goddamn letter, ignoring my statements about the re-characterization and simply stating that "a Roth IRA contribution is not deductible blahblahblah...."

WTF? Has anybody had this problem before? How do I resolve it? Do I need an accountant, a tax lawyer? I would just pay the damn taxes and move on with my life, except that now I have the $5500 stuck in a traditional IRA which will get taxed again when I withdraw it. It's freaking ridiculous. I will never contribute to an IRA prior to filing my taxes, ever again, on the chance that I might have to re-characterize. Not worth the headache. Any help would be appreciated.
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Cathy

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Re: IRS Problems with IRA Re-Characterization
« Reply #1 on: October 29, 2016, 04:26:41 PM »
Your post is vague as to the precise timeline and what specific steps you took and did not take on what dates. This makes it difficult to evaluate your situation. A qualified professional armed with all of the relevant information and documents should be able to help you in a timely manner.

It's your choice what kind of professional to retain. Generally, lawyers, certified public accountants, and enrolled agents are all authorised to represent you before the IRS, subject to certain conditions and exceptions. See "Who Can Practice Before the IRS?" in IRS Publication 947 for a summary of which professionals are authorised to practice before the IRS. Please note that informal publications such as IRS Publication 947 do not have the force of law and may be incorrect. Zimmerman v. Commissioner, 71 TC 367, 371 (1978), aff'd without opinion 614 F 2d 1294 (2nd Cir 1979) ("[T]he authoritative sources of Federal tax law are in the statutes, regulations, and judicial decisions and not in ... informal publications.").
« Last Edit: October 29, 2016, 04:32:20 PM by Cathy »
This post contains only general information on the issues raised by this topic. This post does not provide help tailored to your specific situation. There are many facts that could be relevant to your specific situation and I am not in possession of those facts. If you need help tailored to your specific situation, you should retain an appropriate professional and not rely on this post.

bacchi

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Re: IRS Problems with IRA Re-Characterization
« Reply #2 on: October 29, 2016, 09:31:57 PM »
I can only tell you what worked for me, which is send the documents again and again until someone enters the submitted data into their computer system or until someone with time and intelligence reads it.

Good luck.

bdoubleu

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Re: IRS Problems with IRA Re-Characterization
« Reply #3 on: October 30, 2016, 05:36:05 AM »
Do you actually qualify for a deductible traditional IRA? What is your modified AGI and do you have a 401k plan at work you qualify for? Single? Married? You state you earned more than anticipated so wanted to go from Roth to traditional. For example, in my personal situation, since I qualify for a 401k at work, the income limit for being able to deduct traditional IRA contributions is quite low, so earning more makes me ineligible to deduct ira contributions, so I do Roth.

I realize there are plenty of scenarios where your desire to recharacterize from Roth to traditional makes sense, but you didn't provide enough information.

Mississippi Mudstache

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Re: IRS Problems with IRA Re-Characterization
« Reply #4 on: October 31, 2016, 10:13:50 AM »
Your post is vague as to the precise timeline and what specific steps you took and did not take on what dates. This makes it difficult to evaluate your situation. A qualified professional armed with all of the relevant information and documents should be able to help you in a timely manner.

My paperwork was not on hand when I made the post, but I have it in front of me now.

02 MAY 2014: Contributed $5500 to a Roth IRA
03 FEB 2015: Re-characterized $5500 Roth IRA contribution from 2014, plus gains, as a traditional IRA contribution.
29 FEB 2016: Received Notice CP2000 from IRS, notifying me that I underpaid taxes because I claimed an IRA deduction of $11,000 (mine + my wife's), but only $5500 was deductible
18 MAR 2016: Sent response to IRS after confirming that my 2015 Form 5498 properly documented the re-characterization in the previous year.
16 MAY 2016: Received another Notice CP2000 from IRS, which had basically the same wrong information on at as before
15 JUN 2016: Sent another response to the IRS, this time with a statement from my broker which confirmed that the re-characterization was properly documented and the pertinent forms were submitted to the IRS
Last Month: Received another Notice CP2000 from the IRS, along with a letter that completely ignored any mention of the re-characterization and re-iterating that Roth IRA's are non-deductible.

For reference, my AGI in 2014 was 70,532 in 2014 (Married Filing Jointly) - nowhere near the cutoff for a deductible IRA.

I will take bacchi's advice, and send the documents over again until I get a competent employee to review them. I think I may just send the same documents every day for a week to improve my odds.
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secondcor521

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Re: IRS Problems with IRA Re-Characterization
« Reply #5 on: October 31, 2016, 10:58:21 AM »
Is it possible the IRS is complaining about your wife's $5500 contribution and not yours?  That is, maybe there was some mistake made with *her* contribution, and you are mistakenly thinking it has to do with your contribution because of your recharacterization?

Maybe take a look at the paperwork and see if there is any way to tell which of you it is referring to?  May be difficult since you apparently filed jointly and the IRS notices are probably fairly generic.
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Nothlit

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Re: IRS Problems with IRA Re-Characterization
« Reply #6 on: October 31, 2016, 11:32:59 AM »
Is there a phone number on the CP2000 that you can call and talk to a person? You may be able to cut through the confusion more quickly that way. I have never had to do this personally, but I have heard anecdotes online and in person from people who have cleared up relatively minor problems like this over the phone.

Mississippi Mudstache

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Re: IRS Problems with IRA Re-Characterization
« Reply #7 on: October 31, 2016, 11:41:56 AM »
Is it possible the IRS is complaining about your wife's $5500 contribution and not yours?  That is, maybe there was some mistake made with *her* contribution, and you are mistakenly thinking it has to do with your contribution because of your recharacterization?

Yes, it's definitely my contribution that is at issue. They have confirmed that my wife's IRA contribution is not the problem.

Is there a phone number on the CP2000 that you can call and talk to a person? You may be able to cut through the confusion more quickly that way. I have never had to do this personally, but I have heard anecdotes online and in person from people who have cleared up relatively minor problems like this over the phone.

I suppose I should try this. I thought it would be easier to handle by mail, since I could send in all the supporting documents, but that's obviously not helping.
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Mississippi Mudstache

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Re: IRS Problems with IRA Re-Characterization
« Reply #8 on: October 31, 2016, 12:32:43 PM »
The number on the IRS notice goes to an automated system. There is no option to speak with an actual human.
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Mississippi Mudstache

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Re: IRS Problems with IRA Re-Characterization
« Reply #9 on: November 01, 2016, 11:44:52 AM »
Well, I decided to retain the services of a CPA. He reviewed my paperwork this morning and concluded that the IRS is incompetent. Hopefully I will have good news to report eventually, but he said the process could take a few months to resolve.
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Cwadda

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Re: IRS Problems with IRA Re-Characterization
« Reply #10 on: November 01, 2016, 12:19:07 PM »
I'd say just make a bunch of calls and fight through the red tape until you find someone at the IRS that knows what they're doing and can resolve your case.

jezebel

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Re: IRS Problems with IRA Re-Characterization
« Reply #11 on: November 01, 2016, 02:11:14 PM »
I recently sent a response to IRS for the same exact issue.  Recharacterized my 2014 Roth contribution to a traditional IRA in Jan. 2015.  Received the same notice that you did two months ago.  I have little hope that I won't have the same experience.  What is your CPA doing for you that you can't do yourself?  Just asking out of curiosity ;)
« Last Edit: November 01, 2016, 02:35:09 PM by jezebel »

CareCPA

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Re: IRS Problems with IRA Re-Characterization
« Reply #12 on: November 01, 2016, 02:15:22 PM »
I'm not representing the OP, so I'm speaking in generics here, but we get a special phone number where we can actually talk to an IRS agent. It generally makes it much easier than trying to mail responses.
Always happy to help with tax or accounting questions - feel free to private message me.

I am a licensed CPA in Pennsylvania. However, any tax advice I give should be considered general information and not used in the avoidance of tax. There is most likely information about your situation that I do not know, and thus you should do your own additional research.

Yes, in case it confuses you, I did change my forum name.

Mississippi Mudstache

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Re: IRS Problems with IRA Re-Characterization
« Reply #13 on: November 01, 2016, 02:47:33 PM »
I recently sent a response to IRS for the same exact issue.  Recharacterized my 2014 Roth contribution to a traditional IRA in Jan. 2015.  Received the same notice that you did two months ago.  I have little hope that I won't have the same experience.  What is your CPA doing for you that you can't do yourself?  Just asking out of curiosity ;)

The very fact that a response is coming from a dude who has special letterhead, with special letters behind his name, will hopefully cause whatever over-worked IRS agent is assigned my case to take notice and understand that he/she should actually pay attention. I don't think I can possibly communicate my point any more clearly than I already have in my two previous letters to the IRS. I have already spent 3 entire working days collecting documents, speaking to my IRA custodian, and writing letters. I suspect I  would have been better off referring the matter to a CPA from the very beginning. I will let you know how things progress.
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secondcor521

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Re: IRS Problems with IRA Re-Characterization
« Reply #14 on: November 01, 2016, 03:33:30 PM »
Maybe too late for OP, but there is an IRS advocate program that people can use:

https://www.irs.gov/advocate

"The Taxpayer Advocate Service (TAS) is your voice at the IRS. We ensure you are treated fairly, and know and understand your rights. If you are having tax problems and have not been able to resolve them with the IRS, you may be eligible for free TAS help."

Never used them, can't say if they're good or not.
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mizzourah2006

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Re: IRS Problems with IRA Re-Characterization
« Reply #15 on: November 01, 2016, 07:13:27 PM »
Do you actually qualify for a deductible traditional IRA? What is your modified AGI and do you have a 401k plan at work you qualify for? Single? Married? You state you earned more than anticipated so wanted to go from Roth to traditional. For example, in my personal situation, since I qualify for a 401k at work, the income limit for being able to deduct traditional IRA contributions is quite low, so earning more makes me ineligible to deduct ira contributions, so I do Roth.

I realize there are plenty of scenarios where your desire to recharacterize from Roth to traditional makes sense, but you didn't provide enough information.

This, I'm a little confused how you could make to much to contribute to a Roth IRA, but still be able to deduct the 5.5k from your income as part of a traditional. Perhaps if your employer doesn't provide a retirement account.

Edit: ok, you just wanted to recharacterize to get the deductible, not because you were over the income limits.
« Last Edit: November 01, 2016, 07:15:43 PM by mizzourah2006 »

johnny847

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Re: IRS Problems with IRA Re-Characterization
« Reply #16 on: May 01, 2017, 04:27:18 PM »
OP, did you ever get this resolved?

Mississippi Mudstache

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Re: IRS Problems with IRA Re-Characterization
« Reply #17 on: August 24, 2017, 06:21:19 AM »
I see that it has been nearly a year since I started this thread. I'm happy to report that I have finally resolved the problem. The IRS admitted that they were mistaken, and they are dropping the case.

A bit more detail, for those who are interested: My CPA wrote a detailed letter to the IRS explaining that my IRA should have been deductible, because I was under the income limits, and I properly re-characterized it. He essentially said the same thing that I said, but on letterhead. The IRS did not accept the explanation. They set up a court date for October 2017. Shortly thereafter, I was contacted by a settlement agent. I explained my position to her. She seemed to understand, but asked me to send in a bunch of paperwork (that I had already sent in many times before). Months went by. I was contacted by a tax lawyer/professor at a college in Atlanta who was doing a pro bono tax settlement day. I signed up for a consultation, which would have cost me an entire Saturday after factoring in travel. My settlement agent found out that I was signed up, and finally contacted me again. She explained that the IRA was non-deductible, because I was over the income limits. She told me there was no point in going to the settlement day, because there was no way the IRS would find in my favor. She quoted the specific page from form 590 that supposedly showed that I was over the income limits. I read the form. Nope. The IRS was still wrong. I would have been over the income limit for single or married filing separately. I filed married filing jointly, and was about $25,000 below the income limit for claiming a deductible IRA. I called her back to explain. She put me on hold. The she hung up. Three hours later, she called back and told me the IRS was dropping the case, and she would be putting the paperwork in the mail to finalize it. I wish I could get the 40 hours of my life back that I spent defending their frivolous case, but I'm just glad that it's all finally over.
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Gone Fishing

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Re: IRS Problems with IRA Re-Characterization
« Reply #18 on: August 24, 2017, 06:52:31 AM »
Damn. 

dandarc

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Re: IRS Problems with IRA Re-Characterization
« Reply #19 on: August 24, 2017, 07:20:04 AM »
Damn - I hope you were just unlucky on this, because I've done this same thing for 3 years running, although in our case it was a partial recharacterization on both of our IRAs.

Such a weird thing for the IRS to push back on - the limit is clear.  Sounds like somewhere in your file, someone mis-keyed your filing status.  But you'd think that would flag far more issues than "IRA deduction is not allowed", so who knows.

I'm always amazed how many "government information systems" are basically a couple of spreadsheets because the powers that be didn't want to wait for a more robust solution.  It gets real fun when it gets to the "someone made this spreadsheet 15 years ago.  We don't know how it works, but you have to use it . . ." stage.  Maybe you ran into one of those.  I'd like to think the IRS has the resources to not be doing that with things this important, but I wouldn't be surprised.

Paul der Krake

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Re: IRS Problems with IRA Re-Characterization
« Reply #20 on: August 24, 2017, 08:06:31 AM »
Thanks for the update.

I have recharacterized IRAs a few times. If a clear cut case such as OP's had happened to me, I would have loved to defend myself in court and make them look like idiots. Or is self-representation in tax court a bad idea?

Mississippi Mudstache

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Re: IRS Problems with IRA Re-Characterization
« Reply #21 on: August 24, 2017, 10:44:38 AM »
Damn - I hope you were just unlucky on this, because I've done this same thing for 3 years running, although in our case it was a partial recharacterization on both of our IRAs.

Such a weird thing for the IRS to push back on - the limit is clear.  Sounds like somewhere in your file, someone mis-keyed your filing status.  But you'd think that would flag far more issues than "IRA deduction is not allowed", so who knows.

I'm always amazed how many "government information systems" are basically a couple of spreadsheets because the powers that be didn't want to wait for a more robust solution.  It gets real fun when it gets to the "someone made this spreadsheet 15 years ago.  We don't know how it works, but you have to use it . . ." stage.  Maybe you ran into one of those.  I'd like to think the IRS has the resources to not be doing that with things this important, but I wouldn't be surprised.

I did a re-characterization in 2015, which has not yet caused me any problems. I think the problem that caused the IRS system to hiccup on my 2014 return was the fact that I re-characterized a traditional-to-Roth conversion BACK to a traditional, in addition to a re-characterization for my 2014 contribution. I caught a glitch in their machinery, and everyone at the IRS was so convinced that their system must be right that they just gave me a series of ill-considered reasons why I must be wrong. Every time I spoke to them, it was a different reason. It might have been fun to defend myself in court, but I'm glad it didn't come to that.

Lesson learned: starting with tax year 2016 onward, I've decided to simply make my IRA contributions after working up my 1040, and prior to filing my taxes. I'm in a weird tax level where it's not clearcut from year-to-year how much I should contribute to a Roth vs. traditional, so if I make contributions during the year, it's pretty much unavoidable that I will need to re-characterize. I understand that I'll be losing a year of returns on my IRA contribution each year, but interest on $11,000 just isn't worth a week of my life.
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