IRA transfer nets me big IRS tax bill

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lws6772
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IRA transfer nets me big IRS tax bill

Post by lws6772 » Mon Apr 20, 2009 3:17 pm

In Nov. '07 I moved my trad. IRA at a bank to a credit union. I had the bank mail me the check(never again) and in less than a week's time it was at the credit union in a trad. IRA account. I thought end of story, since I had did it this way before and never had a problem. March '09 I receive a tax bill for $35K on the transaction. It appears the credit union never sent a form to the IRS, so the IRS thinks I just kept the check. I have spoke with the credit union 3 times and am still not sure what they are going to do to help me. They have even suggested when I mailed them the check that I didn't state it was for an IRA transfer, though their online records show that it was put in an IRA account. I mailed the IRS as much documentation as I could collect on my own, which was paperwork from the bank and online records I printed off from the credit union's website. My question at this point is: isn't it now the credit union's responsibility to send the IRS the correct documentation, form 5498 or whatever it is? Thanks very much for any comments.

sscritic
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Re: IRA transfer nets me big IRS tax bill

Post by sscritic » Mon Apr 20, 2009 3:46 pm

lws6772 wrote:In Nov. '07 I moved my trad. IRA at a bank to a credit union. I had the bank mail me the check(never again) and in less than a week's time it was at the credit union in a trad. IRA account. I thought end of story, since I had did it this way before and never had a problem. March '09 I receive a tax bill for $35K on the transaction. It appears the credit union never sent a form to the IRS, so the IRS thinks I just kept the check. I have spoke with the credit union 3 times and am still not sure what they are going to do to help me. They have even suggested when I mailed them the check that I didn't state it was for an IRA transfer, though their online records show that it was put in an IRA account. I mailed the IRS as much documentation as I could collect on my own, which was paperwork from the bank and online records I printed off from the credit union's website. My question at this point is: isn't it now the credit union's responsibility to send the IRS the correct documentation, form 5498 or whatever it is? Thanks very much for any comments.
Has the IRS responded yet? I don't think you have a problem. You don't have to convince the credit union you did a rollover, just the IRS.

When you do a rollover, there is no requirement you use the same money. My wife once took $70k out of an IRA in November and spent it. I convinced her to open a new IRA for $40k in January within the 60 day period, using other money. On our taxes, I noted that we had received $70k and that $40k had been rolled over. There was never a problem. All you need to do is provide the IRS with the amount and date of the withdrawal and the amount and date of the deposit into the new IRA.

I am not a lawyer, an IRS agent, or any one with any special knowledge, just someone who has experienced an indirect rollover.

earlyout
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Tax reporting

Post by earlyout » Mon Apr 20, 2009 3:53 pm

Did you report the distribution and the rollover on your 2007 tax return? The IRS received their version of the 1099R for the distribution from the bank and should have sent you a 1099R for the distribution from your IRA. As SSCRITIC mentions, you have to report the rollover on your tax return.

It may be necessary for you to file an amended return for 2007.

EO

edited to correct typos
Last edited by earlyout on Mon Apr 20, 2009 10:32 pm, edited 1 time in total.

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Taylor Larimore
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IRA Transfer

Post by Taylor Larimore » Mon Apr 20, 2009 3:55 pm

Hi ws:

You should not worry if you reinvested the money into the new IRA within 60 days.
"There are two basic ways you can move your IRA assets from one financial institution to another: an IRA transfer or an IRA rollover. In an IRA transfer, your IRA assets are sent directly from your current financial organization to your new financial organization (i.e., the IRA assets are not distributed to you). In an IRA rollover, on the other hand, your IRA assets are distributed to you and you must subsequently redeposit them into an IRA within 60 days to avoid taxation. (Note: There are restrictions regarding how frequently you may roll over your IRA assets; therefore, be sure to familiarize yourself with the restrictions before taking a distribution of your IRA assets.)"
https://www.pennmutual.com/pmlwebsite/p ... _8301.html

You have sent a letter of explanation to the IRS. That should be the end of it.
"Simplicity is the master key to financial success." -- Jack Bogle

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nisiprius
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Post by nisiprius » Mon Apr 20, 2009 4:14 pm

Don't panic. Don't be afraid to talk to the IRS. I don't know why people are reluctant to do this. They're reasonably helpful and I don't think you have anything to lose by doing it.

Ask them exactly what hoops you need to jump through, what forms you need to file, and what documentation you need to get.
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Taylor Larimore
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Get it in writing.

Post by Taylor Larimore » Mon Apr 20, 2009 4:37 pm

Don't be afraid to talk to the IRS.
I am sure nisiprius will agree that it is better to communicate in writing when a tax dispute is involved.
"Simplicity is the master key to financial success." -- Jack Bogle

TheEthicalAdvisor
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Post by TheEthicalAdvisor » Mon Apr 20, 2009 4:56 pm

lw,

Just out of curiosity, did the original (transferring bank) ever withhold taxes? Usually there is a 20% withholding on non-direct rollovers. A lot of people make the mistake of only depositing the amount after the withholding, which is incorrect, and very taxing. I just point this out, I figure that you knew that that, for example, $100,000 was in the old bank and $100,000 was then deposited in the new bank.

-Evan

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lws6772
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Post by lws6772 » Mon Apr 20, 2009 5:30 pm

Thanks very much for all your help. To answer the questions; the IRS has not responded yet(just sent in the paperwork 2 days ago), we did not report the distribution on our '07 taxes(my ignorance), and the original(transferring bank) did not without any taxes(I deposited 100%).

sscritic
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Post by sscritic » Mon Apr 20, 2009 5:49 pm

lws6772 wrote:Thanks very much for all your help. To answer the questions; the IRS has not responded yet(just sent in the paperwork 2 days ago), we did not report the distribution on our '07 taxes(my ignorance), and the original(transferring bank) did not without any taxes(I deposited 100%).
Always remember that you are responsible for correctly reporting your income, not your credit union (aside: some people who post here think Vanguard is responsible for reporting things correctly to the IRS, but it is not, you are). The IRS may want you to file an amended return, but don't do anything until you hear back from them. They may just accept your evidence and fix things at their end without you doing anything else.

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magellan
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Re: Get it in writing.

Post by magellan » Mon Apr 20, 2009 6:29 pm

Taylor Larimore wrote:
Don't be afraid to talk to the IRS.
I am sure nisiprius will agree that it is better to communicate in writing when a tax dispute is involved.
That's certainly the most prudent approach. Although when I got an IRS letter claiming that a prior year IRA deduction was disallowed, my first instinct was to call the number on the letter to get the scoop. Once I validated the phone number on the letter, that's exactly what I did.

I was very pleasantly surprised by the professionalism, competence, and friendliness of the agent I spoke with. After just a few minutes on the phone, I knew exactly what the problem was and what I needed to do to fix it. A former part-time employer had accidentally checked the retirement plan box on my w-2 in a year I wasn't eligible for their retirement plan. As instructed by the IRS agent, I forwarded a letter from my old employer to the IRS explaining the error. Within 30-60 days of sending the IRS the letter, I received a reply that the case was closed and no additional taxes were due.

Anyhow, I wouldn't rely solely on any advice you get over the phone, but a quick call might shed some additional light on the issue and quickly get you on a path to correct the issue.

Jim

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Post by retiredjg » Mon Apr 20, 2009 6:58 pm

I was under the impression that if they send you a check, rather than do a trustee to trustee transfer, that they had to withhold 20% for federal taxes. Are you sure you got all your money?

Of course, that could just be the rule for my plan, not all plans.

Ron
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Post by Ron » Mon Apr 20, 2009 7:01 pm

Just a negative comment, as related to the IRS.

My son did a traditional to Roth conversion in 1999, and paid the federal tax due. At the time, he still lived with us (he is disabled) and we covered most of his day to day expenses. Even though he has a B/S in CIS from a state university, his disability keeps him from keeping a job.

In 2005, he was able to improve his personal life through certain actions. Due to his disability, he became eligible for SSD (based upon the little work he did over the years, since he contributed to SS), along with Medicare. At the same time, he was able to get support services that let him leave our home; initially to a group home, and then a year later to a shared apartment with another guy (who has his own challenges).

Due to "setting up housekeeping" for the first time, he needed a lot of cash, and since he was now in programs that would assist in his needs (both from an income and social services need) he withdrew the full value of his Roth IRA. Due to his disability, I contacted Vanguard about the withdrawal that it could be "labeled" properly for the IRS.

Well, while getting the 2005 forms in early 2006 to complete federal taxes, the distribution form did not indicate that it was due to his disability (which was confirmed with Vanguard through proof of the SS finding of disability). Vanguard said that they could not label the distribution as such, due to current IRS regs. They suggested I contacted the IRS for guidance.

I did so, calling the IRS service number and spoke to a representative. After explaining the situation, he commented that based upon what I told him, there would be no problem (famous last words :cry: ). I was to just document the situation and send it in with my son's return.

Well, everything's OK? In mid-2007, he received a letter from the IRS, telling him he owed taxes on over 10k of income (the Roth distribution). Of course I contacted the IRS, and they said they needed "proof". I responded that I had included all documentation with his return, including the SSA determination of his full disability, the letter from Vanguard on the distribution, and my own input of my conversation I had with the IRS phone rep.

They responded with "they never received any additional documentation". OK, so I took the same bundle of paperwork, copied it, and sent it to their office, via registered mail.

A few months later, my son received a delinquency notice of the amount due, plus fines/interest. Of course, I got on the phone to the IRS and again explained the situation. Again they said they never received documentation, even though I was holding a "return receipt" in my hand (of course no signature - just an IRS stamp and date).

Next step? I went to the local IRS office. They could not help me, but gave me the contact of the Taxpayer's Advocate Office. I sent them the info (again registered, again lost). When my son received the next notice, the fees/interest was growing. When I contacted the Advocate's Office, they again asked me to send the documentation.

This time I simply said "no", and I contacted my congressional representative’s office (this was about 18 months ago). They listened to my story, took all the documents, and contacted the IRS on my behalf. During that time, my son received two additional interest/fine due letters. Contacting my congressman's office, they said that since the case was in process, the IRS was not to send any letters.

Well, about a month ago, my son received a letter from the IRS which stated that he would not get his federal tax refund due (which he needs for his living expenses); it was seized for past due taxes.

Today, he received another letter from the IRS, in which they said that they were proceeding with actions against him to "seize property" (luckily, he has none). I have a call in to my congressman's office, and awaiting a response.

Needless to say, you can talk to the IRS by phone, you can talk to them via mail (even certified), but you can't get them to listen.

Anyway - just my opportunity to vent over this.

- Ron

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Post by sscritic » Mon Apr 20, 2009 7:10 pm

retiredjg wrote:I was under the impression that if they send you a check, rather than do a trustee to trustee transfer, that they had to withhold 20% for federal taxes. Are you sure you got all your money?

Of course, that could just be the rule for my plan, not all plans.
Vanguard wrote:Payment option; 20% withholding. If you elect to have an eligible rollover distribution from an employer’s qualified retirement plan paid directly to you, your distribution will be subject to 20% federal income tax withholding.
It appears that withdrawals from 401(k)'s require 20% withholding; withdrawals from IRA's do not.

GG
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Post by GG » Mon Apr 20, 2009 8:12 pm

TheEthicalAdvisor wrote:lw,

Just out of curiosity, did the original (transferring bank) ever withhold taxes? Usually there is a 20% withholding on non-direct rollovers. A lot of people make the mistake of only depositing the amount after the withholding, which is incorrect, and very taxing. I just point this out, I figure that you knew that that, for example, $100,000 was in the old bank and $100,000 was then deposited in the new bank.

-Evan
Obviously not true. Only an issue with qualified plans, not IRAs.

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Post by TheEthicalAdvisor » Mon Apr 20, 2009 8:45 pm

GG wrote:
TheEthicalAdvisor wrote:lw,

Just out of curiosity, did the original (transferring bank) ever withhold taxes? Usually there is a 20% withholding on non-direct rollovers. A lot of people make the mistake of only depositing the amount after the withholding, which is incorrect, and very taxing. I just point this out, I figure that you knew that that, for example, $100,000 was in the old bank and $100,000 was then deposited in the new bank.

-Evan
Obviously not true. Only an issue with qualified plans, not IRAs.
My mistake, I misread the original post and immediately thought 401k rather than IRA.

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lws6772
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Post by lws6772 » Mon Apr 20, 2009 8:51 pm

Ron, thanks for your story and I feel for your son's situation and all that your family has been through. I hope it gets better. But I'm glad you vented, especially if it will help you. It has helped me. My son became disabled in '03 and I had previously started a Roth for him. We had considered liquidating the Roth, but after reading your story I don't think we will attempt it. It is only about 2K and I know it would not be worth the stress on us if we got into a problem like yours. Sometimes I wish we had never established IRA's.

isleep
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Post by isleep » Mon Apr 20, 2009 9:35 pm

Ron wrote:Just a negative comment, as related to the IRS.
If this story wasn't so sad, it would be hilarious. It reminds me of the cases where the RIAA/MPAA were suing completely innocent people. I think they even tried to sue a dead guy once...
AA goal: 70% VTWSX (taxable), 12.5% VBMFX (IRA), 12.5% VIPSX (IRA), 5% VMSXX

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grabiner
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Post by grabiner » Mon Apr 20, 2009 10:58 pm

Ron wrote:Well, about a month ago, my son received a letter from the IRS which stated that he would not get his federal tax refund due (which he needs for his living expenses); it was seized for past due taxes.

Today, he received another letter from the IRS, in which they said that they were proceeding with actions against him to "seize property" (luckily, he has none). I have a call in to my congressman's office, and awaiting a response.
It's also time to get a lawyer; if the IRS takes an unreasonable position and loses in court, it may have to pay your attorney's fees as well, so a letter from a lawyer gives the IRS a strong incentive to settle. (Of course, this is not legal advice, but a lawyer can certainly give you some.)

And this is also a reminder that you should avoid getting a tax refund; if the IRS makes a mistake, it's much easier for it to hold up a refund than to seize money it doesn't already have. (I've twice had state refunds held up due to the state's error.)
Wiki David Grabiner

HotRod140
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IRA transfer nets me big IRS tax bill

Post by HotRod140 » Wed Apr 22, 2009 6:10 am

I just went through the same exact problem. After Receiving the notice, I called the IRS, the woman on the phone could'nt have been more helpful. She explained what I needed to do, gave me her fax number and desk phone number. After Sending the required paperwork, she called me at home (one week later) to inform me that the matter was closed and they would send me an official notice in 4 weeks. I advise you to talk to them, they made a stressful situation very easy.

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lws6772
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Post by lws6772 » Mon Jul 13, 2009 5:10 pm

Update: after all the dust settled, we ended up only owing $270 dollars. The $270 was unreported interest as far as we can tell. One thing is for sure, I will be MUCH more careful in the future and not assume or rely on anyone. Thanks again for everyone's help and calming words.

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Post by pshonore » Mon Jul 13, 2009 7:40 pm

The key here is all tax documents must be reported on your tax return. That means all W-2s, 1099R, 1099B, 1099Int, 1099Q, 1099Div, K1, 1099Misc, etc. The IRS gets electronic copies of all those and its a very simple matter to see if what they received adds up to whats on your tax return. It takes a while but sooner or later, bells go off and letters go out.

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