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Terry D

IRS Letter

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Client received a letter from the IRS regarding a distribution from a Roth IRA for TY 2016. This is not a CP2000. The 1099R was coded J, no exceptions apply from a Roth IRA. The IRS is stating the full amount of the distribution is taxable. I am currently waiting on information from his broker regarding the  character of the distribution. I have advised them of the ordering rules that principal is distributed first, then earnings. They are having a difficult time trying to come up with the character of this distribution or any documents supporting what the principal and interest was. What I know is my client started contributing to the IRA several years ago beginning sometime in the early 90's. He is under 59 1/2 years old. But no tax on the principal only the earnings. In TY 2017 the 1099R was marked the same way for a smaller distribution but the total distribution box was checked. Certainly some of these funds are earnings. My client has until Tuesday Nov 13th to respond to keep his rights to petition the tax court available. I can't believe that no one seems to know what the principal and earnings were for this account. The IRS is going to assess 20K+ for 2016. Don't know how to address this situation. I can't even assume the ordering rules were followed as of this moment, no proof of anything. How would anyone here handle this?

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Does the client not have any paperwork from what he put in? Is it on a worksheet (as ti would not show up on the 1040) what his contribution would be each of the years? Is this the same broker? and he doesn't have any records? I would push this broker or a previous one to come up with contributions... if not the client himself - check made out? auto transfer? for that money - can he have the bank, look for the transaction around 4/15 each year?

Brest of luck

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i had two similar situations this year where the client could not come up with the basis and the transcripts of forms 5498 did not show sufficient basis.  

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Don't know your definition of early nineties but Roth type IRAs started with the Tax Relief Act of 1997.  Is it possible he originally had a traditional IRA later converted it to a Roth IRA? If so, it could be the reason the basis is difficult to establish by the broker.

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Max W beat me to it.  I was going to say get the 5498's going back to Adam.  If you have a POA on file, use one of the transcript services (Canopy is free for transcripts; PitBullTax and TaxHelpSoftware both also can do this but have fees) and pull transcripts back to 1980.  Those will show contributions and what type.  

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Thanks for replies., I did push the heck out of the broker. He was able to come up with a statement that shows the figures I need to address the letter. While they are for TY 2013, the adjustments mean a very small tax due using those figures. So, I am including a breakdown of the statement and how the taxable portion was obtained. Now, it will be the waiting game to see if the IRS accepts the response. Doing it this way still keeps the tax court petition option open.

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Need a bit of assistance here. The client in my scenario is not 59 1/2 years old but has made contributions to this IRA for over 10 years. Still working on trying to get my hands on the 5498 forms to show the character of the contributions but that might be a tough hurdle to cross. In the mean time, and due to the fact my client does not meet both of the requirements for the earnings from the Roth to be tax free, but the contributions are, does the early withdrawal penalty exist on the earnings? I looked at section 408 and there is no clear language regarding this area. What I have done is calculated the earnings that would be taxable and included that amount as taxable income. My client will include the check for the amount in the response to the notice. If there is any penalties due, I will let the IRS calculate them. I a, getting the feeling the IRS will ask for additional information. Also, I realized that this response will not extend the deadline to petition the tax court. We will discuss this at length.

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It may be difficult to get the 5498´s, but you can get IRS transcripts going back 10 years.  If you use e'services and TDS, it can be done on line.  It is not necessary to get the entire Income transcript as different forms can be specified.  The forms will indicate whether the contributions were IRA or Roth.  Any ROTH earnings prior to 59.5 yrs would incur a penalty.  The good part of a ROTH is that the basis is withdrawn first, so if you know what it is, the client can withdraw just that amount and avoid penalty.

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On 11/8/2018 at 10:14 AM, Catherine said:

Max W beat me to it.  I was going to say get the 5498's going back to Adam.  If you have a POA on file, use one of the transcript services (Canopy is free for transcripts; PitBullTax and TaxHelpSoftware both also can do this but have fees) and pull transcripts back to 1980.  Those will show contributions and what type.  

It would be nice if you  could get transcripts going back to 1980, but the 5498's are in the Wage and Income transcripts and they only go back ten years.  You would have to make a 4506-T request  and there is no guarantee you will get all of them.

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12 hours ago, Max W said:

they only go back ten years.

Thanks for correcting.  With any luck, those ten would have enough to cover what was withdrawn.

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