Roth IRA double contributions in one year error

[Guest flyboy73]

Hi folks, I had recently done some digging into my Roth IRA portfolio just to monitor fund performance and sector allocation, something I regretfully have ignored for the past 14 years I have been invested in a Roth. My portfolio is all mutual funds, mostly active large cap stock funds from a few different providers.

I had noticed that I accidentally double contributed for the tax year 2004. I contributed $3,000 (the max allowed for that year) in April 2004 for the 2004 tax year to one fund, but I had also contributed $3,000 the following year in another fund, also for the 2004 tax year.

I understand this could be considered an excess contribution, and I will be socked with a 6% penalty for each year the excess is left in the funds. Is there any way I could ask the fund custodian for one of the funds to change the tax year to say, 2003? I noticed that I had contributed to a Roth every year EXCEPT 2003, so it looks like that is the reason for my error.

Or, could I instead just ignore my mistake and pretend nothing happened? How would the IRS know about this, would they even pick up on the duplicate 2004 contributions when I take distributions when I finally retire?

I'm ok with paying the penalty, but I am hoping that I could just simply explain my error to the fund custodian, have them make a change to the tax year and be done with it.

[ETA Consulting LLC]

You should contact the IRS and obtain all your tax reports going back as far as they can provide (possibly 10 years). You want to reconcile the Forms 5498 for all years. If you double deposited in a year, it should stand out.

Good Luck

[Guest flyboy73]

Hi, thanks for the reply. I did keep copies of the 5498s I received from the plan administrators, as well as copies of the IRA applications I filled out, for both funds. After careful some investigation, I found out that I did not check of the "prior year contribution" box on the application for one of the funds, which explains the double contribution.

I am going to work with the plan administrator to see what my options are. Do I still need to notify the IRS? Should they have noticed this discrepancy? I'm no expert, but I'd imagine this situation may happen often, and there should be a way for the IRS to notify someone if they accidentally double contribute for a tax year.

[masteff]

Speaking strictly from a personal point of view and not giving anything which should be considered any form of advice, I would have to ask myself whether that income tax year was still subject to IRS audit and if it was not then I would personally and only for myself conclude that it was better to leave it alone than to do anything that might reopen the IRS's authority to audit said tax year. But that's only my personal opinion and shouldn't be taken as anything more than that.

After rereading your original post, you didn't double contribute for 2004. The recordkeeper made a simple notational error in 2004 on your 2003 contribution. It's insignificant and immaterial. No harm, no foul. I would personally ignore it and move on.

[Bird]

I'm with Masteff. I'm all for doing things "right", but there wasn't some kind of cheating going on, it was just a paperwork mistake. I don't think at this point there would be any red flags, and in the unlikely event it comes up you just keep the paperwork you have noting the missing (2003) contribution that logically says one of the 2004s was for 2003.

[Guest flyboy73]

I have pulled out my 1040s for 2003 and 2004, to reconcile with what I see on my 5498s and the IRA adoption agreements in finding if anything is amiss. It turns out that I actually had an entry in my 2003 1040 IRA worksheet for the $3,000 in the first fund (Columbia Acorn Fund). This is the fund I contributed to in April 2004 that I mistakenly did not check the "prior year contribution" box, and as a result Columbia Funds then assigned the $3,000 to the 2004 tax year. For the 2004 1040, the IRA worksheet also had a $3,000 entry, for the "duplicate" second fund (Dodge and Cox International Fund). So, my original intent to contribute to the prior year with each yearly Roth contribution was intact, and I can now clearly see where I messed things up.

In the IRS's eyes, my 1040s show no double contribution for 2004, whereas, the 5498s from both funds each show a 2004 contribution. Before I pulled out my 2003 tax forms, I was under the impression that the second fund (Dodge and Cox) was the errant fund with excess funds, but now it appears that I may have to pull out the excess from the first fund, Columbia. I guess what I am trying to determine is, which form (1040 or 5498) would the IRS use as the deciding document to choose which of the two funds to remove the excess contribution and attributable earnings from?

Looking back, I wish I kept a detailed record of when and for what tax year I made my Roth contributions, but, I'm glad I caught it now rather than later, if ever. I thank you again for your assistance!

[mbozek]

There are two possible options that flyboy 73 needs to discuss with a tax advisor as I cannot provide legal or tax adivce.

1. withdraw the $3000 and attributable earnings and treat it as an excess contribution for 2003 by filing a 5329 form paying all applicable taxes. He would need to complete Part IV of the 5329 form for 2003. My understanding is the 6% tax is cumulative for each year back to 2003. Penalty would be thousands of $.

2. not file the 5329 form which would continue to accumulate the 6% excise tax. Risk is that IRS could impose the tax whenever it discovers the error since a 5329 form has not been filed. IRS position is that statute of limitation for excise tax liability begins only when the 5329 form is filed. However it appears that excess contributions to Roth IRAs fall into the black hole of reporting for many complex retirement plans provisions. I know several taxpayers who failed to take MRDs without adverse consequences and when advised of the requirement to file a 5329 responded that they would double up on the MRD for the current year or they would wait until notified by the IRS. None filed the 5329 and I am unaware that they were audited. And of course there is no way to enforce the wash sale rule as it applies to IRAs.

Q-anyone know of a taxpayer who was notified by the IRS that an MRD was not taken?

What is interesting is that IRS software may only review Roth contributions made during the calendar year to determine if the $ limit for that year was exceeded, i.e, if $ amount contributed in 2004 does not exceed Roth contribution limit for 2004 tax return will not be flagged, without checking to determine what tax year the contribution is allocated to by the taxpayer.

[masteff]

MJB, the fact pattern doesn't fit your solutions.

- In April 2004, taxpayer made a contribution for 2003 but failed to mark a box indicating to the IRA company that it was a prior year contribution.

- Later in 2004, taxpayer made a contribution for 2004 using a different IRA company.

- In 2005, both IRA companies issued 5498's for 2004.

This is a 5498 error at most.

Also, under what authority would the IRS be able to go back and audit that tax year to even find it?

[mbozek]

MJB, the fact pattern doesn't fit your solutions.

- In April 2004, taxpayer made a contribution for 2003 but failed to mark a box indicating to the IRA company that it was a prior year contribution.

- Later in 2004, taxpayer made a contribution for 2004 using a different IRA company.

- In 2005, both IRA companies issued 5498's for 2004.

This is a 5498 error at most.

Also, under what authority would the IRS be able to go back and audit that tax year to even find it?

In his initial post flyboy stated that he made he made a $3000 contribution in April 2004 and then made his intended Roth contribution for 2004 in the following year which I assume was 2005. So he made one $3000 contribution in 2004 and 1 in 2005. He did not make two 3000 contributions in 2004. What he did was make 1 contribution to his Roth IRA in each calander year from 2003 on but for the contributon made in 2004 he falied to note that it was to be allocated to 2003.

Under IRC 6501 S/l to assess taxes is limited to 3 years (with some exceptions) after the return is filed. There is no S/l if a return is never filed which is why taxpayers are prosecuted for failure to pay taxes going back 10 or more years. Whether the IRS could discover all taxpayers errors in their data base and what would be the cost to recover the information it is beyond my pay grade which maybe why minor infractions of the tax law are just not discovered or enforced by audits. Or are being swept up in safe harbors.

For example, the IRS announced that they are granting a safe harbor for home office deduction which does not exceed $1500. Taxpayers electing the safe harbor will not have to provide detailed information to justify the deduction. Reason: IRS doesnt have the resources /data to check/audit each taxpayer who claims HO deduction.

[Guest flyboy73]

MJB has described my situation perfectly. The only evidence I suspect that the IRS has of this mistake are with their copies of the 5498s for both funds showing two $3,000 contributions for 2004.

You both raise a good question, in regards to the likelihood that the IRS would decide to audit that far back. I have never been audited, and although one can "never say never", I follow the law and do not believe I would ever be at risk of an audit in the future. But, if i overlook my discovery of my mistake, would the IRS find out about this eventually when I do take qualified distributions from either Roth?

If not for my own curiosity to tally up the years I made Roth contributions in the past, I never would have discovered this discrepancy, and chances are neither would the IRS. The penalties are pretty big, and I am sure there are many out there who have made honest mistakes, by either contributing by accident too much money or the maximum allowed amount twice in a single tax year, and never catch their errors, so why should I be penalized because I fess up to a simple clerical error. And most importantly, it is not like I contributed double the max amount ($6,000) during the 2004 calender year and had that principal generate earnings starting in April 2004. The $3,000 contributions started generating returns in separate years, in accordance with IRS regulations. So in my mind, technically, there is no excess contribution to speak of, just a clerical error on the 5498.

Thanks again for your interest in my situation, you folks are really helping put my mind at ease!

[mbozek]

You have raised the interesting queston of whether ther IRS would ever discover this error and if it did what action would it take. While the IRS receved the 5498 forms indicating how much you contributed to your Roth IRA and what years the contributions were to be allocated to we dont know whether the 5498 information was processed into the IRS data base. Second, even if it was in the IRS data base the IRS would have to create a program to extract that data and then audit taxpayers who exceeded the contributon limits and compute the taxes due which would be complex in the case of excess IRA contributions. I dont think the IRS has resources to devote to such a project for the amount of revenue that would be collected.

Your situation brings to mind a question that I have not been able to resolve of what happens if an IRA owner fails to take MRDs. Assume an individual who reaches 70 1/2 does not commence IRA distributions. As I understand it the custodian does not notify the IRS or issue a check for the MRD and the IRS does not track whether the IRA owner took a MRD. At the IRA owners death the IRA is inherited by the owner's children who begin taking MRDs based on their life expectancy. Since the Inherited IRAs will be reported using the beneficaries SS numbers, the IRS will not be aware of the failure of the owner to take MRDs. The only thing the IRS knows is that distributions have commenced from an Inherited IRA owned by a beneficiary. The beneficaries have no tax liability for the owner's failure to take MRDs since they are unrelated taxpayers and are only required to take their MRDs from the inherited IRA. How would the IRS collect the 50% excise tax?

[masteff]

1) Just my opinion but I think you underestimate the IRS' computers. Although I wonder how well it handles multiple year scenarios like this.

As I understand it the custodian does not notify the IRS

2) That's changed in recent years. See this notice and also Form 5498. http://www.irs.gov/pub/irs-drop/n-02-27.pdf

But you may be correct w/ respect to inherited/beneficiary IRAs.

[mbozek]

Just noticed that my response to post #12 was never entered as a reply.

The box designating a check mark if a MRD is required is meaingless because there is no requirement that an MRD be taken from that IRA. Just because the IRS collects information doesnt mean that it acutally processes it and audits taxpayers. I know of many instances were MRDs were not taken without the IRS auditing the taxpayer which is why I asked the question of whether anyone know of a taxpayer who had been audited for failure to take an MRD. It appears that the IRS is not reviewing tax returns to determine if MRDs are being paid. I know of one instance where a taxpayer failed to note a distribution from a qualified plan and IRA rollover on the 1040 without the IRS auditing the return.