Mistake made in 98 - how to correct it???

[Guest JasonHenley]

I made a mistake in 98. I was eligible to convert my Traditional IRA to a Roth and did so. I informed my preparer, and also told him I wanted to pay the conversion taxes over 4 years. In mid 2000, I discovered that in both 98 and 99, no mention of my conversion was made on my return. In simpler terms, not a dollar of taxes has been paid on my 98 conversion for two years. I know it is my fault for not reviewing my return more carefully, but there it is. My new tax preparer advises me to wait until I receive a letter from the IRS wanting the tax paid. However, I think I should either report the entire conversion amount on my 2000 return and pay the sum at once, or perhaps, should amend my 1998 return, and perhaps, the 1999 return as well. Any advice given would be appreciated.

[John G]

You may have a much bigger problem then you think. First question is did the sloppy first tax preparer file the conversion attachments to the first tax return. If this was a large conversion, then you have major problems. If you are talking about a six figure conversion, your excuse you did not know will not hold water.

I think your current tax preparer is way off target. If you knowingly evade paying taxes that are due, you may be criminally prosecuted. If you find and correct a problem before the IRS discovers it you have a much better chance of an equitable result. Where do you find these "advisors" anyway?

You will find better opinions at this site then you appear to be getting locally. Wait for some additional comments to get logged in on your options and possible tactics. Your first tax preparer may have some legal liability for penalties (you owe the taxes and interest) if she/he was fully informed on the facts and did not complete an accurate return.

[Guest JasonHenley]

Thanks for the reply. No conversion attachments were filed with the return in 1998. And the total amount converted was about 5000 dollars. Again, I feel it was my responsibility to review the returns in 98 and 99 - I should have caught the mistake. Really, I'd like to just get square with the IRS now rather than later. My thoughts were to either report the converted figure on my 2000 return on line 15b, or to file an amended return for 98 (Although I'd then need to amend 99 as well). Liability aside, I'd really just like to know how to fix this. Again, thanks for the initial thoughts...JH

[Guest Mary Ann]

You would have received a 1099R for your distribution from your IRA in the amount of the $5,000 for 1998. Did you give this to your tax preparer? Perhaps the entire $5,000 was reported on your 1998 tax return - at least look to see. If not, then it would be proper to go back and amend your 1998 and 1999 tax returns. It would not be proper to include the entire amount in your 2000 tax return.

[Guest JasonHenley]

Mary Ann,

I have reviewed the documents provided to my preparer in 1998 and the 1099R is attached. I really don't know what happened, but the conversion was not reported. I've decided that amending the 1998 return and paying the tax in full on the conversion is the proper way to go. I suppose to do so, I must file a 1040X, and attach a 1998 version Form 8606 to it. Would this be correct? Much, much thanks for the advice....JH

[John G]

Since you are talking about the tax on $5,000 an not some mega conversion, and since you appear able to pay the tax, I think the simplest situation is to make an appointment for after April 16 with the IRS and present the problem. Since 1/4 of 5,000 could get easily lost on a tax return and since the 1099R was attached you may want to ask the IRS to waive the penalties and just pay the tax and interest. Read that tax return carefully this year!

[Appleby]

If I may put in my 2-cents worth.

I agree with Jon G.- don’t wait. Make the corrections ASAP.

You will need to file IRS Form 1040X- Amended tax return. Make sure you include the conversions on the amended returns- this will tell you how much tax you owe. If you IRA assets included non-deductive contributions, you also want to file IRS Form 8606- this will help to determine what portion of the conversion is taxable.

You will not be able to spread the conversion over four years, as this election was required to be made on you 1998 tax return. This means it must all be included on you amended 1998 original tax return.

Consult the IRS to help you determine any interest you may owe- attach a letter of explanation to your amended return- this usually helps.

If the amount you owe is substantial, talk to the first CPA about compensating you for some of the expenses- he/she should be held responsible- unless they did your return for free. If he/she refuse to, tell him/her you will ensure everyone knows about his or her incompetence