IRS claiming rollover as taxable income?

[justanotheradmin]

Has anyone else had a problem with the IRS issuing letters stating that an IRA rollover is taxable income?

Five different participants rolled traditional IRA money into their 401(k) plans (4 separate plans, all different employers) in 2016. the 1099-Rs appear to have been issued correctly, showing a code G since they were all direct transfers, and zero taxable amount. 

These five individuals all received letters in the last few months stating the amounts rolled over were taxable and listed the amount of tax and interest due. In at least one instance the letter even mentioned that the 1099 had a code G on it. 

I'm not sure, but I think the common denominator may be that none of these individuals reported the rollover on their personal tax returns. Rather than reporting the rollover with zero listed as taxable, I think it was left off the return completely. I can't confirm for all of them, but for at least one this is the case. 

I do know the IRS sends out letters if things are reported to them by employers / financial institutions / etc and don't match up with what some reports on their personal return. But ultimately, the amounts aren't taxable, so saying the rollover IS taxable seems ridiculous.

We see our clients do a lot of rollovers, usually without a blip from the IRS, so to have several this year with inquiries feels like a lot, but maybe it is typical for the IRS. 

[Larry Starr]

Have not seen this particular error, but this is one that a correspondence with the reviewer should clear up.  Not reporting on the personal return a zero taxable direct transfer DOES NOT make the transfer taxable.  And not reporting an amount that doesn't change the taxable income or the tax due does not change the tax aspect of the transfer.  So something else is going on.  I would try calling the reviewer first if this was my client, but the bottom line is that IRS will eventually concur, it's just real annoying to have to deal with it, but then again, this is the stuff I get paid for on an hourly basis! :-)

[justanotheradmin]

Thanks Larry. I agree, some correspondence and communication with the reviewer does seem to work, but it just seemed like a lot all at once. And in the meantime, the advisor and the participant are stressed out. Two came up last week, and another this morning. 

I guess it's just a coincidence that there have been several all with the same kind of notice.  

[Larry Starr]

1 hour ago, justanotheradmin said:

Thanks Larry. I agree, some correspondence and communication with the reviewer does seem to work, but it just seemed like a lot all at once. And in the meantime, the advisor and the participant are stressed out. Two came up last week, and another this morning. 

I guess it's just a coincidence that there have been several all with the same kind of notice.  

It's probably a systematic failure in their system. This is the kind of thing that it might make sense to forward to Craig Hoffman at ASPPA for him to help determine if it's a systematic problem that we need to inform IRS about to prevent excess work by way too many people.  Go ahead and let Craig know if you wish to pursue. 

[XTitan]

I had this happen to me last century.  In my case, the 1099 was issued late, I filed my taxes early, and since I "knew" there was no tax impact of the rollover, I didn't think about it.  When I got my letter from the IRS saying I owed taxes, I just provided all of the back-up and filed a 1040-X.  No harm, no foul.

[shERPA]

it is a systemic problem, it just happened to a client of mine last week and it happened to me personally a few years ago.  IRA custodians issue 1099-Rs, but 401(k) plans don't issue 5498s or anything else that would match up the 401(k) plan roll-in with the IRA distribution.   

In my own case I had properly reflected this on my 1040 with a net zero taxable amount, but that didn't stop the inquiry.  

Letter, copy of statement or other evidence of deposit to the 401(k) clears it up.  On the first try, at least for me. 

It's a bit disconcerting for clients who are not used to dealing with IRS to get something from them, and it's not exactly a friendly inquiry, it is basically a statement telling the taxpayer they have recalculated their taxable income and tax.

[justanotheradmin]

Thanks shERPA for confirming its systemic. 

I had to spend a bit of time last week educating an advisor about Form 5498. Apparently two participants who received the letter had some sort of communication from the IRS agent that the form was needed. The advisor was pretty adament that we needed to prepare 5498 for that 401(k) plan. Of course I refused. 

I see things like this crop up every so often, it just seemed noticeably worse this year. And yes, some of the amounts the IRS is claiming is due are scary! At least it would be to someone who is leery of the IRS. 

 

[Larry Starr]

17 hours ago, justanotheradmin said:

Thanks shERPA for confirming its systemic. 

I had to spend a bit of time last week educating an advisor about Form 5498. Apparently two participants who received the letter had some sort of communication from the IRS agent that the form was needed. The advisor was pretty adament that we needed to prepare 5498 for that 401(k) plan. Of course I refused. 

I see things like this crop up every so often, it just seemed noticeably worse this year. And yes, some of the amounts the IRS is claiming is due are scary! At least it would be to someone who is leery of the IRS. 

 

Being able to take a full power of attorney (I'm an Enrolled Agent) tends to solve these things since I  just get the POA signed and then I deal with IRS and solve the problem.  I tell the client it's just normal IRS screw ups; it happens all the time and we always resolve it so don't worry.  That tends to solve the problem as it relates to the client side of the controversy. But granted, it would be great it ASPPA could get them to realize they have a systematic problem and solve it, but I'm afraid it's just one of many items on their "fix it" list.

[Pam Shoup]

I have seen this happening for the last few years.  Usually, it is a participant who rolls the money into a plan we manage who has failed to report the rollover on their tax return.  We provide a copy of the rollover check and any other backup information to the participant and this usually clears it up for the IRS.  

[Earl]

Received one this week also.

[Lou S.]

Had a participant get one earlier this year. Fixed with simple letter but a PITA to deal with the nonsense.