Retirement Savings and Benefits
Questions and comments about IRAs, 401k accounts, social security, and other forms of retirement savings and benefits.
IRS woes
Posted by: jonesyguy, September 17, 2017 05:26PM
Yesterday we received one of those dreaded letters from our friends at the IRS pointing out that we " failed to report 30K of income in 2015 " . They were kind enough to compute my new balance of 9K in more taxes and of course the extra 3.5K in interest and penalties.
In tracing the "undocumented income" and it has to do with a tIRA to Roth transfer of 30K in AUG. 2015. I did not want this risky Hi-Yield account money to co-mingle with my very successful Roth account in case of a redo. A genius at Vanguard said no problem...we will just set up a separate stand alone account for this and merely call it Roth #2 and name your other old account Roth #1.

So 30K was put in Roth #2 and it promptly nosedived to 28K over the next 5 months. In Jan. 2016 I realized that not only taxes were due on this 30K but I also lost 2k in principle so a redo is in order, 28K was transferred back to tIRA and I thought at least no taxes owed...

Now finally I ask three questions...when I did my taxes on 2015 in March, 2016 I had a 1099-r showing this distribution on line 15a I decided to put zero on line
15b because I had recently rechartacterized this money so in my opinion no taxes were owed....should I have gone ahead and declared this as income, paid taxes on it and then in 2016 file an amended return asking for a
refund ? Is the IRA correct and I owe all this money ?

My other question...the people at Vanguard sent me a 1099-r for 2016 showing that 28K had been shifted back and in BOX 7 they had the letter "N" seems to me that they miscoded it and the correct code should have been "R" as it happened in 2015 with a 2016 redo.Maybe this is what prompted the IRS letter and fine?

Re: IRS woes
Posted by: Alan S., September 17, 2017 06:14PM
You are correct about the N code being incorrect and should have been coded R. The IRS would then think that the 2015 conversion remained in place. And if you did not include an explanatory statement regarding the conversion and recharacterization with your 2015 return, that would also have contributed to the IRS letter.

While line 15b should have been left blank, you do not owe tax but will have to convince the IRS of that.

Would suggest you first contact Vanguard to have the recharacterization 1099R corrected to code R. If they indicate this will be done within a month or so, no need to contact the IRS at this time. When you get the corrected 1099R, send a copy to the IRS with an explanation of the dates and amounts of the conversion and the recharacterization.

Re: IRS woes
Posted by: jonesyguy, September 21, 2017 12:05PM
Thank you Alan S.

As instructed , I contacted Vanguard and over the past 3 days have escalated this to upper management. Finally, yesterday they actually admitted their error and " are now working on correcting it "
What chafes is is that it may take another week or two to accomplish...I mean really...go to the 1099-R site for 2015 and merely switch the "N" to become the correct "R"...this should take 5 minutes.
May I also assume that when this is done... they report the change to the IRS ? Does Vanguard get it trouble or fined by the IRS for this miscoding ?
I have NEVER had one mistake or error cited by the IRS since I have been retired in 2004. Will this "error" now redflag me with the IRS to delve into future returns ?
BTW..I have been a loyal client of Vanguard since 1975 and this is the one and only screw up ever so.. no intent on bashing Vanguard here.

Re: IRS woes
Posted by: Alan S., September 21, 2017 03:59PM
Both you and the IRS should get a copy of the corrected 1099R. Since it is for a prior tax year, it should be issued very soon and on the correct 1099R year. The 1099R year should be 2016, and the code changed to R. The form should also clearly show "corrected" on it so the IRS will know that the prior incorrect 1099R is void.

There are no fines for single errors, but it is possible that if a single custodian makes a huge amount of errors over a period of time in relation to their size, the IRS could fine them. Because of their size Vanguard probably makes a few thousand similar errors each year. Since these errors are also costly for an IRA custodian, they normally attempt to limit them and Vanguard is highly focused on controlling costs.

You will not be flagged by the IRS since it is clear that Vanguard made the error, not you.

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