IRS letter regarding Backdoor Roth IRA

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apple44
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IRS letter regarding Backdoor Roth IRA

Post by apple44 » Thu Mar 14, 2019 5:24 pm

Like several on this forum, I received a letter from the IRS regarding my 2016 backdoor Roth IRA conversion. The IRS considers the $11,000 conversion by my husband and me as taxable income. The letter says: "If the income is an IRA or lump sum retirement distribution and was rolled over, please send us a Form 5498 with the amount in box 2 or similar documentation."

So I downloaded Form 5498, but on the instructions provide:
Box 2: Shows any rollover, including a direct rollover to a traditional IRA or Roth IRA or a qualified rollover contribution to a Roth IRA you made in 2016. It does not show any amounts you converted from your traditional IRA, SEP IRA or SIMPLE IRA to a Roth IRA. They are shown in box 3.
Box 3: Shows the amount converted from a traditional IRA, SEP IRA or SIMPLE IRA to a Roth IRAin 2016.

I deposited money in the traditional IRA account and then moved that money to Roth IRA account, which is a backdoor Roth IRA conversion, right? Charles Schwab issued a Form 5498 for 2016 and correctly reported $11,000 in box 3.

Why does the IRA want me to send them a Form 5498 with the amount in box 2? What should I do?

Please help!!! Thank you!

Thesaints
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Re: IRS letter regarding Backdoor Roth IRA

Post by Thesaints » Thu Mar 14, 2019 5:27 pm

Send them the form with the amount in box 3. I suppose the IRS is sending a stock letter than only covers box 2 rollovers.

cherijoh
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Re: IRS letter regarding Backdoor Roth IRA

Post by cherijoh » Thu Mar 14, 2019 5:57 pm

apple44 wrote:
Thu Mar 14, 2019 5:24 pm
Like several on this forum, I received a letter from the IRS regarding my 2016 backdoor Roth IRA conversion. The IRS considers the $11,000 conversion by my husband and me as taxable income. The letter says: "If the income is an IRA or lump sum retirement distribution and was rolled over, please send us a Form 5498 with the amount in box 2 or similar documentation."

So I downloaded Form 5498, but on the instructions provide:
Box 2: Shows any rollover, including a direct rollover to a traditional IRA or Roth IRA or a qualified rollover contribution to a Roth IRA you made in 2016. It does not show any amounts you converted from your traditional IRA, SEP IRA or SIMPLE IRA to a Roth IRA. They are shown in box 3.
Box 3: Shows the amount converted from a traditional IRA, SEP IRA or SIMPLE IRA to a Roth IRAin 2016.

I deposited money in the traditional IRA account and then moved that money to Roth IRA account, which is a backdoor Roth IRA conversion, right? Charles Schwab issued a Form 5498 for 2016 and correctly reported $11,000 in box 3.

Why does the IRA want me to send them a Form 5498 with the amount in box 2? What should I do?

Please help!!! Thank you!
A Roth conversion is NOT a rollover. So the IRS doesn't want you to send a Form 5498.

Please answer the following questions:
1) Did you report the IRA distribution used to do the rollover on your 2016 1040? What was shown as the total distribution? What was shown as the taxable distribution?
2) Did you have any other traditional IRAs (including SEP IRAs) with a balance at the end of 2016?
3) Did you fill out a form 8606? If so which parts?

ThankYouJack
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Re: IRS letter regarding Backdoor Roth IRA

Post by ThankYouJack » Thu Mar 14, 2019 6:09 pm

You may want to call them to see if they can help clarify what form they want. Just be prepared to be on hold for while and it may not be that helpful.

And after you submit your response, be prepared to wait a while before you get a written response. Hopefully it's just an "all clear", but it may take a couple times going back and forth.

Hope it gets sorted out quickly! I just went through an IRS correspondence audit myself for missing a tax lot on a tax loss harvest. It's part of the reason why I don't want to do a backdoor Roth IRA.

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smarcus3
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Re: IRS letter regarding Backdoor Roth IRA

Post by smarcus3 » Thu Mar 14, 2019 7:45 pm

Form 8606 part i and ii needed to be filled out I believe
This is my personal opinion. I'm an engineer not a financial advisor.

Topic Author
apple44
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Re: IRS letter regarding Backdoor Roth IRA

Post by apple44 » Fri Mar 15, 2019 11:39 am

cherijoh wrote:
Thu Mar 14, 2019 5:57 pm
A Roth conversion is NOT a rollover. So the IRS doesn't want you to send a Form 5498.

Please answer the following questions:
1) Did you report the IRA distribution used to do the rollover on your 2016 1040? What was shown as the total distribution? What was shown as the taxable distribution?
2) Did you have any other traditional IRAs (including SEP IRAs) with a balance at the end of 2016?
3) Did you fill out a form 8606? If so which parts?
On my 2016 1040: Item 15a IRA Distributions: I reported 0.
On Form 8606, I filled out the following and no other items for both me and my husband ($5,500 each, hence $11,000 in total)
Item 1: Nondeductible contributions to traditional IRAs for 2016: $5,500
Item 2: Total basis in traditional IRAs: 0.
Item 3: Add lines 1 and 2: $5,500.
Item 14: Totable asis in traditional IRAs for 2016 and earlier years: $5,500.

From Charles Schwab, I received a Form 5498 and a Form 1099-R.
Form 5498 has item 3 Roth IRA Conversion amount of $11,000.
Form 1099-R has item 1 Gross distributions and Item 2 Taxable Amount filled out with $11,000.
I think this is why IRS sent me the letter because the bank is telling them that there's a taxable distribution of $11,000 yet I have zero on my 1040.
Was Charles Schwab mistaken? Should I ask them to issue a new 1099-R? Or what should I tell the IRS?

Thank you!
ThankYouJack wrote:
Thu Mar 14, 2019 6:09 pm
Hope it gets sorted out quickly! I just went through an IRS correspondence audit myself for missing a tax lot on a tax loss harvest. It's part of the reason why I don't want to do a backdoor Roth IRA.
For sure! I'm not doing this backdoor stuff ever again!

Alan S.
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Re: IRS letter regarding Backdoor Roth IRA

Post by Alan S. » Fri Mar 15, 2019 12:12 pm

Almost all of the IRS issues on back doors are caused by a flawed 8606 form. In this case, further confusion was added by the IRS asking for the 5498. They should already have the 5498, and should have realized that you didn't roll your distribution to a TIRA, you converted.

Since you did the conversions in 2016, your 8606 should have a complete Part I (or tax program prepared worksheets in some cases) and a completed Part II. Line 14 would 0 or close to 0. Since you didn't report the conversion on Form 8606 (each spouse), the IRS thinks you might have rolled it over to TIRA, and that is why they asked for a 5498 showing a rollover.

What you need to do is file a corrected 8606 for each spouse showing the 5500 conversion in Parts I and II. The 8606 should also show no taxable amount on line 18. You could also send the IRS a copy of the 5498 they already have showing a conversion contribution of 5500 each.

Schwab's 1099R is correct, you just didn't report the conversion.

Depending on what you did in 2017 or 2018, you might have to correct or amend those returns as well since your line 14 basis amount on the incorrect 2016 8606's would result in an incorrect line 2 on any later 8606 forms.

Topic Author
apple44
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Re: IRS letter regarding Backdoor Roth IRA

Post by apple44 » Fri Mar 15, 2019 1:07 pm

Thank you Alan S. That's very helpful!!!

Topic Author
apple44
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Re: IRS letter regarding Backdoor Roth IRA

Post by apple44 » Fri Mar 15, 2019 1:57 pm

When I did my 2016 tax return, I used TurboTax and didn't fill out a tax form -- Turbotax filled out the 8606 with my answers to their questions.
Now that I'm doing the 8606 myself, I realized how much information is missing!

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celia
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Re: IRS letter regarding Backdoor Roth IRA

Post by celia » Fri Mar 15, 2019 2:44 pm

apple44 wrote:
Fri Mar 15, 2019 1:57 pm
When I did my 2016 tax return, I used TurboTax and didn't fill out a tax form -- Turbotax filled out the 8606 with my answers to their questions.
Now that I'm doing the 8606 myself, I realized how much information is missing!
A lot of people have trouble entering the data for a Backdoor Roth correctly. You should usually first report the contributions that are non-deductible. Then go back to an earlier section in the software to report the conversion. When the Form 8606 is generated, you need to examine it carefully. In particular, you need to see what the remaining basis is, if any, and how much of the conversion is being taxed, if any.

If you started your 2017 or 2018 taxes by importing the previous year tax data, you likely imported an incorrect basis, so the later year returns may not be correct. The Backdoor Roth wiki pages explain what the Form 8606 should look like. (It will be different if the year FOR WHICH the contribution applies is different than the year IN WHICH the conversion was done. In this case, each transaction is reported for its respective tax year. That means if you make your 2018 non-deductible contribution between January 1, 2019 to April 15, 2019, you will still report the contribution on your 2018 taxes.)
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.

cherijoh
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Re: IRS letter regarding Backdoor Roth IRA

Post by cherijoh » Fri Mar 15, 2019 3:18 pm

Alan S. wrote:
Fri Mar 15, 2019 12:12 pm
Almost all of the IRS issues on back doors are caused by a flawed 8606 form. In this case, further confusion was added by the IRS asking for the 5498. They should already have the 5498, and should have realized that you didn't roll your distribution to a TIRA, you converted.

Since you did the conversions in 2016, your 8606 should have a complete Part I (or tax program prepared worksheets in some cases) and a completed Part II. Line 14 would 0 or close to 0. Since you didn't report the conversion on Form 8606 (each spouse), the IRS thinks you might have rolled it over to TIRA, and that is why they asked for a 5498 showing a rollover.

What you need to do is file a corrected 8606 for each spouse showing the 5500 conversion in Parts I and II. The 8606 should also show no taxable amount on line 18. You could also send the IRS a copy of the 5498 they already have showing a conversion contribution of 5500 each.

Schwab's 1099R is correct, you just didn't report the conversion.

Depending on what you did in 2017 or 2018, you might have to correct or amend those returns as well since your line 14 basis amount on the incorrect 2016 8606's would result in an incorrect line 2 on any later 8606 forms.
Hi Alan,

Far be it for me to dispute anything you advise about IRAs :happy , but did you see where the OP wrote:
On my 2016 1040: Item 15a IRA Distributions: I reported 0.
Shouldn't that be $11K on line 16a and $0 on line 16b? Dosn't this mean he also needs to file an amended return?

Alan S.
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Re: IRS letter regarding Backdoor Roth IRA

Post by Alan S. » Fri Mar 15, 2019 10:25 pm

cherijoh wrote:
Fri Mar 15, 2019 3:18 pm
Alan S. wrote:
Fri Mar 15, 2019 12:12 pm
Almost all of the IRS issues on back doors are caused by a flawed 8606 form. In this case, further confusion was added by the IRS asking for the 5498. They should already have the 5498, and should have realized that you didn't roll your distribution to a TIRA, you converted.

Since you did the conversions in 2016, your 8606 should have a complete Part I (or tax program prepared worksheets in some cases) and a completed Part II. Line 14 would 0 or close to 0. Since you didn't report the conversion on Form 8606 (each spouse), the IRS thinks you might have rolled it over to TIRA, and that is why they asked for a 5498 showing a rollover.

What you need to do is file a corrected 8606 for each spouse showing the 5500 conversion in Parts I and II. The 8606 should also show no taxable amount on line 18. You could also send the IRS a copy of the 5498 they already have showing a conversion contribution of 5500 each.

Schwab's 1099R is correct, you just didn't report the conversion.

Depending on what you did in 2017 or 2018, you might have to correct or amend those returns as well since your line 14 basis amount on the incorrect 2016 8606's would result in an incorrect line 2 on any later 8606 forms.
Hi Alan,

Far be it for me to dispute anything you advise about IRAs :happy , but did you see where the OP wrote:
On my 2016 1040: Item 15a IRA Distributions: I reported 0.
Shouldn't that be $11K on line 16a and $0 on line 16b? Dosn't this mean he also needs to file an amended return?
The IRA conversion would be on line 15, not 16. But 15b would be 0 (taxable amount) so the 1040 would not change with respect to AGI. So it's a borderline call whether a 1040X is needed. I agree it might be better to file it with the 8606 and use the blank space to explain the reason. It's more work but would reduce the chance of the IRS asking for it. Had there been taxable earnings in the conversion (shown on 15b) the 1040X would definitely be needed.

TexasMu
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Re: IRS letter regarding Backdoor Roth IRA

Post by TexasMu » Sun Mar 17, 2019 11:31 am

apple44

I have recently went through this and wanted to let you know what worked for me

I had incorrectly filled out my 8606. After researching bogleheads about this issue, I followed white coat investors tutorial
https://www.whitecoatinvestor.com/backd ... -tutorial/

I sent a letter stating this was a trustee to trustee transfer and included my form 5498 and corrected form 8606

After 80 or so days I received a letter stating the IRS inquiry is closed and I owe $0

Full disclosure - this took two attempts - I was definitely nervous. Good luck and you can do this!

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