Retirement Savings and Benefits
Questions and comments about IRAs, 401k accounts, social security, and other forms of retirement savings and benefits.
audited (again) for Roth recharacterization
Posted by: RustyShackleford, May 14, 2017 08:25PM
Just got a "CP2000" from IRS claiming un-reported income, because of a Roth conversion that I completely recharacterized the following year before filing.

But, it was resolved fairly painlessly. Instead of mailing in the response form, I simply called the 800-number and got to an agent within 5 minutes or so. Very weird conversation though. She repeatedly asked me why the amount wasn't reported (on line 15b) and I explained that it WAS included on line 15a (with another taxable rollover), but that I recharacterized it. She then decided I needed to file Form 8606; I patiently explained that if I did that, only line 18 would have an entry, and that entry would be zero, and that I was not required to file it (according to my reading of Form 8606, and according to Turbotax). After going around like this several times, she finally said "ok, I am adjusting the amount due to zero, you will get a letter confirming this in 4-6 weeks".

I had a similar experience a few years ago, though things were slightly more complicated (partial recharacterization, and a rechartacterized contribution as well), and it took more than one phone call, but the resolution was similar, with the agent finally seeming as though they simply gave up, and saying I was free to go.

I can't believe the IRS can't get this right. I don't know if my problem was the fact I did a following-year recharacterization, or just that I did a complete recharacterization (and thus no Form 8606). BTW, I DID add an "explanatory statement" to my return, explaining what I did; evident nobody reads these, and they're a waste of time.



Re: audited (again) for Roth recharacterization
Posted by: Alan S., May 15, 2017 01:21AM
Interesting. Some explanatory statements get overlooked, and there is also considerable variation in the understanding of related processes at the IRS. The explanatory statements do reduce the chance of an IRS contact, but occasionally they contact you anyway, especially for a prior year recharacterization.

Re: audited (again) for Roth recharacterization
Posted by: RustyShackleford, May 15, 2017 03:55AM

> ... especially for a prior year recharacterization.

Yeah, I decided to stop doing those, last year, anyhow, as it didn't seem to be worth the trouble.

It was all part of a sneaky scheme do to two low-correlation conversions (e.g. stocks and bonds) and then recharacterize the poorer-performing one as late as possible (i.e. October of the following year).




Re: audited (again) for Roth recharacterization
Posted by: Benn, May 17, 2017 05:28PM
What was the tax year for the return being audited? It would be interesting to know something about the the IRS time frame for audits of this sort.

Re: audited (again) for Roth recharacterization
Posted by: RustyShackleford, May 17, 2017 08:02PM
Benn Wrote:
-------------------------------------------------------
> What was the tax year for the return being
> audited? It would be interesting to know
> something about the the IRS time frame for audits
> of this sort.

2015


Re: audited (again) for Roth recharacterization
Posted by: triad, May 17, 2017 11:39PM
A CP2000 feels like an audit, but isn't actually. It's a letter prompted by a computer detecting a mismatch between forms and return. Traditionally, these are done 18+ months after the due date.

The headache is that the CP2000 program is comparing 2015 forms to the 2015 tax return. A recharacterization can be done as late as 10/15/2016, so when the money changes directions in a different tax year, the forms themselves create a mess.

Theoretically, the AUR group is supposed to review the letters for certain situations so as to not bother the taxpayer if no change is required. Smaller staffs means this isn't happening.

Of course, if the taxpayer failed to attach a statement to the tax return to point out that there was a complete recharacterization (and thus no form 8606), that will make the CP2000 very likely.

Re: audited (again) for Roth recharacterization
Posted by: RustyShackleford, May 18, 2017 12:10AM
I did include the explanatory statement, though I didn't say "... and thus no Form 8606 is required".

Anyhow, I stopped doing following-year rechars after 2015, and will probably stop doing rechars at all after one I did this year.

The last two I did, I did simply to move a security from TIRA to Roth without having to sell-buy it and thus suffer bid-ask spreads. SO I converted the security and did the rechar with cash in the Roth.

Re: audited (again) for Roth recharacterization
Posted by: triad, May 18, 2017 08:29PM
Ack, I hadn't thought about in-kind vs cash conversions. (I still have quite a bit to convert, but I haven't elected any recharacterizations.)

Like I said, AUR group is most likely understaffed--and while good, can't possibly know everything.

The worst CP2000 letters I've encountered were people who did same-day sales of ISOs, but failed to do a schedule D. They knew all the income was visible on the W-2 so it slipped their mind. Imagine getting a letter saying you failed to report $40K of income and please send $17K by the end of the month when, in reality, you owe $0.

Re: audited (again) for Roth recharacterization
Posted by: Alan S., May 18, 2017 08:45PM
I have been getting the impression that the IRS was moving to push back taxpayer contact on IRA issues at least until the second year 1099R had been issued for following year recharacterizations or return of excess contributions. But there will always be exceptions.

Taxpayer compliance with the explanatory statement requirements cannot be good, so if the IRS reacts to a return too soon, it will often result in too many notices and wasteful taxpayer contact. On the flip side, if the IRS notified taxpayers of excess contributions sooner, many of them could be corrected before the due date rather than after.

Re: audited (again) for Roth recharacterization
Posted by: RustyShackleford, May 20, 2017 03:35PM
Alan S. Wrote:
-------------------------------------------------------
> ... so if the IRS reacts
> to a return too soon, it will often result in too
> many notices and wasteful taxpayer contact

I had hoped, after I went through this same thing a few years back, that the IRS would be reluctant to waste resources on contacting me again. Now maybe after this second fruitless (for IRS) episode, they'll be reluctant. Or maybe not, if it's all automated.



Re: audited (again) for Roth recharacterization
Posted by: RustyShackleford, May 20, 2017 03:35PM




Re: audited (again) for Roth recharacterization
Posted by: RustyShackleford, May 20, 2017 03:38PM
triad Wrote:
-------------------------------------------------------
> Ack, I hadn't thought about in-kind vs cash
> conversions.

That should be totally transparent to IRS though.

> Imagine getting a letter saying you failed to
> report $40K of income and please send $17K by the
> end of the month when, in reality, you owe $0.

Mine was close to that. $37K in un-reported income, $12k or so due, including $2K in penalty.






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