Excess Roth contributions

[Sara EA]

Am I the only one who has clients who have Roths and never think to tell us?  A client took a $92k Roth distribution this year.  All I knew about the account is that there was a big conversion amount in 2019.  This year I finally saw my first 5498, which showed a balance twice as high as the conversion so I worked with the FA and discovered that the account existed since 2004!  The FA could only give me the last 10 years of contributions and one other conversion.  I did a ton of historical research on AGI and contribution limits.  For most of those years AGI was way too high to contribute to a Roth.  There were no annual backdoor Roths.  How did this client with seven-figure incomes some years get away with this?

I know IRS pays attention to the 5498s because clients have gotten letters saying they didn't contribute to an IRA when their tax return said they did.  ("Gee, I thought I did.")  Do they not check those same 5498s for excess contribs to Roths??? Anyone ever had a client get caught doing this?

[Hahn1040]

I am going through a similar scenario with a client.  Discovered about a month ago that they have been contributing to a ROTH since forever.  Fortunately it is just the past couple of  years that have been excess.  He was active duty military ... so was never close to the max until 2019 when he retired and had military retirement and civilian job that put him over. Apparently he never felt the need to tell me about the ROTH or provide any statements or 5498s... even though my worksheets ask these very questions... He was able to recharacterize 2020 and 2021.  He withdrew the 2019 contribution.  I had thought that he would have to withdraw contributions plus earnings for 2019.  With some research, I found that once it is past the due date of the return, they just have to withdraw the excess contributions but not the earnings to cure the excess.  

the 6% penalty applies until the excess is withdrawn.

for your client, the $92k distribution would likely cure the excess, but they would owe the 6% for each year since the excess contribution was made.

Indeed!  why has the IRS never caught this!