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Letter Audit of IRA Rollover

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  • Letter Audit of IRA Rollover

    Just got a letter “audit” of my 2017 return. It included a request for documentation on a direct rollover of pretax funds from my IRA to my work 403b (as a first step towards backdoor Roth.) The 1099R was clearly marked with distribution code G for direct rollover. Am I being unreasonable in thinking that is plenty of information for the IRS to understand this was not a taxable transaction? Of course, it is only a minor inconvenience to document the transaction, but I keep wondering if there was something else I should have included in the original tax return?

  • #2
    Did you report this as a non-taxable rollover on your return?

    Comment


    • #3




      Did you report this as a non-taxable rollover on your return?
      Click to expand...


      I don’t think so. That is what I am getting at. How should it have been reported? The 1040 instructions said to only include 1099Rs that showed taxes withheld. I did have include an 8606, but it was for the backdoor Roth portion only. Should I have included this transaction there?

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      • #4
        You didn't include the 1099? Yes you still have to include it.

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        • #5
          Hey there,

          I’m actually looking for the same answer to my question: https://www.whitecoatinvestor.com/forums/topic/traditional-ira-rollover-to-403b/

          for 2017 it would be lines 15a and 15b. 15a is the amount distributed from the pretax IRA to the 403b and 15b would be $0 since it was rolled over to a qualified 403b

          https://www.irs.gov/pub/irs-prior/f1040--2017.pdf

          It looks like you would have had to report it on the 2018 IRS form 1040 on lines 4a and 4b. it seems like can change from year to year.

          https://www.irs.gov/pub/irs-pdf/f1040.pdf

          4a is the amount that was distributed from the traditional IRA which was then rolled over to the 403b. 4b, the taxable amount, would have been $0 since it’s a rollover.

          that’s my best guess, and i’m not a tax person by any means, it’s just been difficult to find an answer online and i’ve been digging thru the IRS’s official documentation on how to report these things.

          feel free to correct me.

          Comment


          • #6
            @Larry Ragman: As pointed out by @xenotar80, you need to report all rollovers and the taxable amount ($0) in this case.

            @xenotar80:

            "For 2017 it would be lines 15a and 15b. 15a is the amount distributed from the pretax IRA to the 403b and 15b would be $0 since it was rolled over to a qualified 403b"

            "It looks like you would have had to report it on the 2018 IRS form 1040 on lines 4a and 4b. it seems like can change from year to year."

            You are correct except it doesn't change "year to year". It was 15a/b for decades prior to 2018. The TCJA caused the IRS to drastically change Form 1040 and add Schedules 1 - 6 for 2018 and going forward.

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            • #7
              Thanks all. I use TaxACt, and just filled in the 1099R data. I was worried I might have missed something, but this all already appears to be included in my 2017 return. So I am back to my opinion that sometimes the IRS auditors just get it wrong. Hopefully this will not matter for me in the future since I have already responded to the IRS re the letter audit and I should not have to do any more pretax transfers from my IRA now that I have cleaned it out.

              Comment


              • #8


                So I am back to my opinion that sometimes the IRS auditors just get it wrong.
                Click to expand...


                Auditors had nothing to do with this, at least that’s my guess. A computer spit it out and you got an automatic letter referring to the activity as an “audit”. This is a different activity than the what the trigger word “audit” means to most taxpayers. Semantics, but sounds much more threatening than “a computer spit out your return”.

                As has been discussed several times on this forum, TIRA conversions to Roth IRAs (aka “backdoor Roth’s”)  are a popular topic for these letters. Not a big deal, just an automated method of bottom fishing. Sounds like you did everything ok.
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                Comment


                • #9





                  So I am back to my opinion that sometimes the IRS auditors just get it wrong. 
                  Click to expand…


                  Auditors had nothing to do with this, at least that’s my guess. A computer spit it out and you got an automatic letter referring to the activity as an “audit”. This is a different activity than the what the trigger word “audit” means to most taxpayers. Semantics, but sounds much more threatening than “a computer spit out your return”.

                  As has been discussed several times on this forum, TIRA conversions to Roth IRAs (aka “backdoor Roth’s”)  are a popular topic for these letters. Not a big deal, just an automated method of bottom fishing. Sounds like you did everything ok.
                  Click to expand...


                  I take your point that an actual audit would be far more intrusive. The letter itself says it is just a notification of a discrepancy but then goes on to recalculate my taxes and presents a bill (including penalties and interest). So I’m probably guilty of using the trigger word “audit” out of order. That said, it was a big enough bill to get my attention.

                  Comment


                  • #10
                    The tone of the these IRS notices are unfortunate. They basically say; "you are guilty, do not pass go, do not collect $200, pay $20,000 or go to jail. For less sophisticated taxpayers, they often just pay the often incorrect assessment out of fear.

                    I have no true basis for this assumption, but anecdotally it appears the IRS is more often wrong on these letters than not when it comes to retirement rollovers/conversions, 529 plan distributions and HSA distributions.

                    I have gotten all three over the years. There was no basis in the returns for these conclusions. In other words, wild ****************** speculation of guilt until proven otherwise. In my case the IRS has always gotten it wrong and "admitted" it, Well, really just IRS speak; "This case is now closed."

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                    • #11
                      I have also had three, but two of mine were 529 related (one for each kid). The last one took me two replies to get the case officer to understand the 1098-T and 1099-Q. It would be interesting to see what percentage of recipients of such letters fold. At least in my case I think I’ve been right each time. I suppose I can’t say for sure I’m three for three until they close this case.

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                      • #12
                        So what what does the OP actually have to do, call? Send documents?

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                        • #13
                          The IRS letter is explicit. It tells the recipient what the discrepancy is between the tax return and the documents it received. In this case it had a 1099R that reported a distribution and the claimed discrepancy was no income declared. (Although this particular 1099R reports a rollover and not a distribution, the IRS saw it as income from a distribution from the IRA.) A new tax amount owed is calculated and penalties and interest are added in a proposed settlement. In order to dispute the discrepancy a justification must be provided to explain the apparent discrepancy. The letter suggests several forms of documentation that would be relevant. I just submitted the actual direct rollover transaction that was associated with this particular 1099R. The IRS allows submission either by fax or mail. I now await their pleasure. In my experience they will either close the case or ask for more information.

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                          • #14
                            “In other words, wild ****************** speculation of guilt until proven otherwise. ”

                            Just speculation, the “computer “ flags the size of the transaction as unusual, disallows it and out comes the notice. It probably wasn’t the actual return, but the size of the transaction indicates “look at this”.
                            Out comes the notice assigned to the agent. Taxpayer submits documentation and explanation and the agent clears it or if reporting errors occurred the paperwork gets fixed.
                            It is guilty until you prove compliance.
                            Btw, those IRS “agents” handle a huge “case load”
                            make under $100k, get hounded for “performance metrics “, customer satisfaction complaints, and collections as well. Don’t blame the agent working for the government. It’s business, not personal.

                            Comment


                            • #15
                              Business for them, but personal for me. By the way, to the extent that it was a computer generated flag, this one at least would have easily been filtered out by an algorithm to check the distribution code. By definition the "G' should have told them it was not going to be taxable. I'm not truly saying I expect that sort of efficiency. It is the government after all. But knowing how easily the issue could be addressed I am not inclined to offer a lot of sympathy for the overworked civil servant.

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