Roth IRA return of excess contribution in 2018. IRS says entire amount returned is taxable?

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b17CC
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Roth IRA return of excess contribution in 2018. IRS says entire amount returned is taxable?

Post by b17CC »

The IRS sent me a letter regarding 2018 tax year saying I owe additional taxes because they say I took an early distribution from my roth IRA that is considered taxable. On my 2018 form 1099-R, there is a line showing a distribution of $1815.35, with the code of 8J in box 7. What actually happened is I overcontributed $1825 through the year, then I asked for a return of excess contribution plus associated earnings or losses in Oct 2018. The amount of $1815.35 was returned based on vanguards calculations. I actually incurred a loss.

I sent a letter to the IRS stating these facts, and the letter I got back was confusing to me. It says "When you receive a form 1099-R with COD J and do not report income on return then a form 8606 must be filed. Please submit complete form 8606 with Part III filled out."

I did originally file a form 8606, but I left Part III blank because it says "A distribution does not include ... ... return of certain contributions." I took that to mean I filled out my 8606 correctly. What did I do wrong? What can I do?
cas
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Re: Roth IRA return of excess contribution in 2018. IRS says entire amount returned is taxable?

Post by cas »

b17CC wrote: Tue Jul 13, 2021 11:20 pm I sent a letter to the IRS stating these facts, and the letter I got back was confusing to me. It says "When you receive a form 1099-R with COD J ***and do not report income on return then a form 8606 must be filed***. Please submit complete form 8606 with Part III filled out."
Emphasis added by me.

With a Box 7 Code of 8J, it sounds like the contributions were *for* 2018, and you had them returned *in* 2018. Is this correct?

The instructions for Form 8606 has a section on "Return of IRA Contributions." It says, in part,
Return of IRA Contributions

If, in 2018, you made traditional IRA contributions or Roth IRA contributions for 2018 and you had those contributions returned to you with any related earnings (or minus any loss) by the due date (including extensions) of your 2018 tax return, the returned contributions are treated as if they were never contributed.

Don’t report the contribution or distribution on Form 8606 or take a deduction for the contribution.

However, you must include the amount of the distribution of the returned contributions you made in 2018 and any related earnings on your
2018 Form 1040, line 4a; or Form 1040NR, line 17a. Also include the related earnings on your 2018 Form 1040, line 4b; or Form 1040NR,
line 17b.

Attach a statement explaining the distribution.

See Pub. 590-B to determine whether you can deduct any loss that occurred.

Also, if you were under age 59 1 / 2 at the time of a distribution with related earnings, you are generally subject to the additional
10% tax on early distributions (see Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts).
Are lines 4a and 4b filled out on your 2018 Form 1040? If not, that may be what triggered the IRS inquiry.

I don't recall what 4b should be in the case of a loss. I think 0, but you'll need to chase down that Publication 590-B reference.

If 4a and 4b are filled out correctly, but you didn't attach the statement, I suppose that could be adding to the difficulty the IRS is having figuring out what you did. (And if they can't figure out what you did, then their default is to assume the whole thing is taxable and leave it to you to prove otherwise.)

And, in the case of a loss, I don't think you'll end up owing any Form 5329 penalty, because there aren't any earning to owe a penalty upon. Don't know what the instructions of Form 5329 say about whether you actually needed to include it with your tax return filing.

Here are the results of a search for anything forum expert Alan S. said about posts that contained the words "1099-R Code 8J loss". You might get more useful information than I can give you if you search through there (or some similar search):

search.php?keywords=1099-R+Code+8J+loss ... mit=Search
Alan S.
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Re: Roth IRA return of excess contribution in 2018. IRS says entire amount returned is taxable?

Post by Alan S. »

cas is correct.

Apparently, the IRS agent does not understand what Code 8 means. Their explanation completely overlooks Code 8, and I don't know how they could miss it, and they missed it twice.
With the loss on your contribution, Box 2a of the 1099R should be blank. You do not owe either tax or penalty on this return of 2018 Roth contributions. But you should have included an explanatory statement for the distribution with your 2018 return. The intent of this statement is to steer the IRS in the right direction, and in this case they went off the tracks.

It is correct that Forms 8606 and 5329 do not apply here. Your 2018 return should have shown the 1815 on line 4a and 4b should be blank.

I suggest you reply in writing with a copy of the 1099R and circle Code 8. Respond with the explanatory statement you should have included with your 2018 return. Example follows:

"On xx/xx/2018 I received a return of 1825 of my Roth IRA contribution for 2018, which was then worth 1815 due to an investment loss. Since this was a return of a current year contribution before the due date, Form 8606 does not apply. Box 2a of the 1099R attached is blank because I incurred a small loss on this contribution. No tax or penalty is due."

It is not clear whether the IRS would have mishandled this if you included the explanatory statement or not, but the IRS has the 1099R, and twice they have shown that they do not understand the codes shown on the 1099R.
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b17CC
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Re: Roth IRA return of excess contribution in 2018. IRS says entire amount returned is taxable?

Post by b17CC »

cas wrote: Wed Jul 14, 2021 8:36 am With a Box 7 Code of 8J, it sounds like the contributions were *for* 2018, and you had them returned *in* 2018. Is this correct?
That is correct.
Alan S. wrote: Wed Jul 14, 2021 12:59 pm Apparently, the IRS agent does not understand what Code 8 means. Their explanation completely overlooks Code 8, and I don't know how they could miss it, and they missed it twice.
This is what concerns me.. I feel like if they missed it twice then I'm doing something wrong, but it seems straightforward.
Alan S. wrote: Wed Jul 14, 2021 12:59 pm With the loss on your contribution, Box 2a of the 1099R should be blank. You do not owe either tax or penalty on this return of 2018 Roth contributions. But you should have included an explanatory statement for the distribution with your 2018 return. The intent of this statement is to steer the IRS in the right direction, and in this case they went off the tracks.
Box 2a is not blank but it does read 0.00. I did not include an explanatory statement but I definitely will now based on both of your advice. See my follow-up question below though, this may be the problem.
cas wrote: Wed Jul 14, 2021 8:36 am Are lines 4a and 4b filled out on your 2018 Form 1040? If not, that may be what triggered the IRS inquiry.
Alan S. wrote: Wed Jul 14, 2021 12:59 pm Your 2018 return should have shown the 1815 on line 4a and 4b should be blank.
Here could be my hang up. My line 4a is 5500, and 4b is 0. The reason I "removed the excess contribution" is that I made too much money to do a straight roth contribution, so I took the money back out within the same year, then contributed the $5500 to a traditional IRA and did a conversion. Alan, if you are saying 4a should be 1815 (without knowing I did a conversion), than should my 4a actually read 7315 (5500 + 1815).
Did I screw that up?
Alan S.
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Re: Roth IRA return of excess contribution in 2018. IRS says entire amount returned is taxable?

Post by Alan S. »

b17CC wrote: Wed Jul 14, 2021 11:13 pm
cas wrote: Wed Jul 14, 2021 8:36 am With a Box 7 Code of 8J, it sounds like the contributions were *for* 2018, and you had them returned *in* 2018. Is this correct?
That is correct.
Alan S. wrote: Wed Jul 14, 2021 12:59 pm Apparently, the IRS agent does not understand what Code 8 means. Their explanation completely overlooks Code 8, and I don't know how they could miss it, and they missed it twice.
This is what concerns me.. I feel like if they missed it twice then I'm doing something wrong, but it seems straightforward.
Alan S. wrote: Wed Jul 14, 2021 12:59 pm With the loss on your contribution, Box 2a of the 1099R should be blank. You do not owe either tax or penalty on this return of 2018 Roth contributions. But you should have included an explanatory statement for the distribution with your 2018 return. The intent of this statement is to steer the IRS in the right direction, and in this case they went off the tracks.
Box 2a is not blank but it does read 0.00. I did not include an explanatory statement but I definitely will now based on both of your advice. See my follow-up question below though, this may be the problem.
cas wrote: Wed Jul 14, 2021 8:36 am Are lines 4a and 4b filled out on your 2018 Form 1040? If not, that may be what triggered the IRS inquiry.
Alan S. wrote: Wed Jul 14, 2021 12:59 pm Your 2018 return should have shown the 1815 on line 4a and 4b should be blank.
Here could be my hang up. My line 4a is 5500, and 4b is 0. The reason I "removed the excess contribution" is that I made too much money to do a straight roth contribution, so I took the money back out within the same year, then contributed the $5500 to a traditional IRA and did a conversion. Alan, if you are saying 4a should be 1815 (without knowing I did a conversion), than should my 4a actually read 7315 (5500 + 1815).
Did I screw that up?
Yes, your 4a should be 7315 since it should include the conversion. As for the removal of excess 1099R Box 2a, that should technically be blank, not 0, but I do not think that contributed to the IRS missing the 8 code.
Topic Author
b17CC
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Re: Roth IRA return of excess contribution in 2018. IRS says entire amount returned is taxable?

Post by b17CC »

Alan S. wrote: Thu Jul 15, 2021 3:07 pm Yes, your 4a should be 7315 since it should include the conversion. As for the removal of excess 1099R Box 2a, that should technically be blank, not 0, but I do not think that contributed to the IRS missing the 8 code.
I see, maybe the line 4a discrepancy is what set off the inquiry as cas suggested. Would it be better to go back to my 2018 turbo tax software and amend/resubmit my return with the updated figure for 4a? Or just explain via return letter the situation, or both? :confused
Alan S.
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Re: Roth IRA return of excess contribution in 2018. IRS says entire amount returned is taxable?

Post by Alan S. »

b17CC wrote: Thu Jul 15, 2021 3:49 pm
Alan S. wrote: Thu Jul 15, 2021 3:07 pm Yes, your 4a should be 7315 since it should include the conversion. As for the removal of excess 1099R Box 2a, that should technically be blank, not 0, but I do not think that contributed to the IRS missing the 8 code.
I see, maybe the line 4a discrepancy is what set off the inquiry as cas suggested. Would it be better to go back to my 2018 turbo tax software and amend/resubmit my return with the updated figure for 4a? Or just explain via return letter the situation, or both? :confused
If you entered your conversion properly, your tax program should have produced the correct amount in 4a and 4b. What about Parts I and II of Form 8606? Are they correct? If not, then you definitely need a 1040 X.
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b17CC
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Re: Roth IRA return of excess contribution in 2018. IRS says entire amount returned is taxable?

Post by b17CC »

Alan S. wrote: Thu Jul 15, 2021 5:58 pm If you entered your conversion properly, your tax program should have produced the correct amount in 4a and 4b. What about Parts I and II of Form 8606? Are they correct? If not, then you definitely need a 1040 X.
Form 8606 Parts I and II are incorrect as well. It just lists 5500 on lines 1, 3, 5, 13, 16, 17.

Do I need to change all those to 7315 along with 4a??

My plan is to change line 4a to the correct amount using a 1040X, redo-ing form 8606 with the correct figures, and writing a letter explaining all this?

Thanks again.
Alan S.
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Re: Roth IRA return of excess contribution in 2018. IRS says entire amount returned is taxable?

Post by Alan S. »

b17CC wrote: Tue Jul 20, 2021 3:25 pm
Alan S. wrote: Thu Jul 15, 2021 5:58 pm If you entered your conversion properly, your tax program should have produced the correct amount in 4a and 4b. What about Parts I and II of Form 8606? Are they correct? If not, then you definitely need a 1040 X.
Form 8606 Parts I and II are incorrect as well. It just lists 5500 on lines 1, 3, 5, 13, 16, 17.

Do I need to change all those to 7315 along with 4a??

My plan is to change line 4a to the correct amount using a 1040X, redo-ing form 8606 with the correct figures, and writing a letter explaining all this?

Thanks again.
Yes, file the 1040 X, which has a box to explain why you are amending your 2018 return. Write small, and state that you are amending to correct Form 8606 and line 4 of Form 1040. 4a will be 7315 and 4b will be 0. Also explain that you contributed 1825 to your Roth IRA, and had the entire amount returned as an excess contribution, which was then worth 1815 and attach a copy of the 1099R coded 8J.

For the 2018 8606, show 5500 on lines 1,3,5,8, and 9. Line 10 should be 1.000, lines 11 and 13 5500. For Part II of Form 8606, enter 5500 on line 16 and 17, and 0 on line 18. Do not complete Part III.

If you can squeeze the entire explanation into the box on the 1040 X you will not need to attach a separate letter.
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celia
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Re: Roth IRA return of excess contribution in 2018. IRS says entire amount returned is taxable?

Post by celia »

OP, please confirm all your contributions and withdrawals for IRAs for 2018. Did you originally contribute $5500 or $1825 to a Roth IRA before requesting the Excess Contribution be Removed (which was then worth $1815)? Then you contributed $5500 to a TIRA which was then declared to be non-deductible and then converted to a Roth IRA (thus performing a Backdoor Roth).

What I’m looking for is what the IRS sees from all custodians as your total contributions for the year. What I also don’t understand is why a custodian’s ‘contribution checker’ allowed you to contribute over $5,500 total in one year to your IRAs. Or did you use two different custodians here? If so, did you have any money in any TIRAs before any of these contributions were made?
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.
Alan S.
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Re: Roth IRA return of excess contribution in 2018. IRS says entire amount returned is taxable?

Post by Alan S. »

Celia, OP stated on 7/14 the following order of 2018 contributions:
1) 1825 Roth contribution
2) Return of 1825 Roth contribution then valued at 1815
3) TIRA contribution of 5500.

Since the first contribution had been removed with allocated (loss), that cleared the decks for the custodian to accept a full new 5500 contribution of chosen IRA type. Any custodian who would block a new contribution in this situation would just be driving away business. Of course, custodian must still report both a 1825 Roth contribution and a 5500 TIRA contribution on separate 5498 forms, but they also know that the IRS will treat the 1099R coded 8 as erasing the Roth contribution.

Even given current IRS service and staffing issues, twice missing a code of 8 is surprising and frustrating, despite OP making other errors.
Asyouwish
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Re: Roth IRA return of excess contribution in 2018. IRS says entire amount returned is taxable?

Post by Asyouwish »

If this was a CP2000, a 1040X is not needed. But IF you want to submit one, make sure you use the address from the CP2000. DO NOT use the normal 1040X address. Only use the CP2000 address or better yet send everything via fax.

Also suggest submitting a copy of the actual 1099-R. For some reason the zero’s (box 2a) don’t transmit over to the transcript. So the IRS only gets the “gross” amount and expects the 8606 to be filled out to satisfy the code J.
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celia
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Re: Roth IRA return of excess contribution in 2018. IRS says entire amount returned is taxable?

Post by celia »

Alan S. wrote: Wed Jul 21, 2021 9:59 am Celia, OP stated on 7/14 the following order of 2018 contributions:
1) 1825 Roth contribution
2) Return of 1825 Roth contribution then valued at 1815
3) TIRA contribution of 5500.
Alan, the OP has yet to say how much the original contribution was, especially since the OP ‘overcontributed $1825 through the year’ (as stated in the original post). I was thinking it could have been $5500, but when the OP saw how much her/his income was going up, s/he could have been in the phase out range and withdrew enough so her Roth contribution would be eligible.

However, your statement, here, is quite clear, if true. What she is missing is that the required statement showing dates for each transaction and that the original contribution lost $10 while it was in the account. The IRS can’t see that fact in the tax return or 1099-R. The IRS computers are waiting for another $10 to be removed, if they are not notified of this loss.

Any custodian who would block a new contribution in this situation would just be driving away business.
I disagree. I’ve never seen a custodian whose agents had the ability to override the ‘contribution checker’. It is there to prevent excess contributions for a reason. For every person who Removes Excess Contributions, there could be hundreds who didn’t do any removal but have set up automatic contributions that would total more than the yearly maximum. No custodian would want to waste their agents’ time cleaning these up when they can be blocked from happening in the first place.

If the OP contributed to IRAs at more than one custodian, the custodian’s names and account numbers should also be included in the description of each transaction.
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.
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