Anyone had this scenario?

I opened a Vanguard IRA, but revoked it within the 7-day limit, and received a check from Vanguard in the mail.

18 months later the IRS sent me a notice that I owed taxes on the distribution.

Did you make profit? Take a loss? Or just get your money back?

Just got my money back.
And the form they sent me showed that the IRA was closed on the same day it was opened.

Did you ask why?

What's a 7-day limit?

buzman

Just send a letter to IRS with copies of the Vanguard notices re opening and closing dates and an explanation as to what happened. Make sure you did not deduct the contribution on your return.

Anyone had this scenario?

No, but I've seen lots of scenarios over many years with my IRA's.

I opened a Vanguard IRA, but revoked it within the 7-day limit, and received a check from Vanguard in the mail.

Never heard of "7 day limit." Do you know the name of the rule? I looked on the IRS website and couldn't find anything with that name.

18 months later the IRS sent me a notice that I owed taxes on the distribution.

Where were the funds coming from to open that IRA with vanguard? Were you starting a new IRA or were the funds from another IRA? Did you sign a distribution form? If you did, did you put the proceeds back into another IRA within 60 days? If you didn't, then you took a distribution, and you probably owe the tax. (But I am not a tax accountant.) If Vanguard made a mistake, they can notify the IRS on your behalf. Also, you will have a statement from the firm that holds your new IRA, that says the money you deposited is a rollover or a transfer deposit. You can send a copy of this to the IRS.

Never heard of "7 day limit." Do you know the name of the rule? I looked on the IRS website and couldn't find anything with that name.

Vanguard's IRA adoption agreement has a clause stating that you can revoke the opening of your account within 7 days. It gives you the opportunity to back out of the commitment.

foolazis

18 months later the IRS sent me a notice that I owed taxes on the distribution.

Then you should have received a 1099R from Vanguard if it was really a "distribution". Otherwise, how would the IRS know?

foolazis
-thinking that someone is mistaken (maybe Vanguard)

Ah, so YOU took the money out. Just because Vanguard let's you take it out within 7 days doesn't mean the IRS does, nor does it mean the account never existed.

You can remove it from Vanguard but to avoid taxes, you'd have to put it back in somewhere else within 60 days.

If Vanguard sent you a 1099-R and you ignored it, well, then you did lie on your return, even if it wasn't intentional. Seems to me there's a decent chance that you owe the taxes.

Yes, this is what I did.

And the Vanguard folks told me that it would be as if the entire transaction never occurred.

Actually the above reply was supposed to be to this post:

Vanguard's IRA adoption agreement has a clause stating that you can revoke the opening of your account within 7 days. It gives you the opportunity to back out of the commitment.

foolazis

Not the one it was attached to.

Right, but my impression is the 'committment' you're backing out of is the one with Vanguard, not with the IRS. I would read over all the terms and conditions that you have, forward them to the IRS, and hope that they agree.

But if they tell you that revoking the Vanguard account doesn't mean diddly to them, then there's not much you can do. And based on the fact that Vanguard apparently send them (and you) a 1099-R, it seems that's fairly likely.

Right, but my impression is the 'commitment' you're backing out of is the one with Vanguard, not with the IRS.

But according to IRS Publication 590, if a year's contribution is withdrawn by the contribution deadline, plus corresponding earnings, if any, it will be treated as if no contributions had occurred (and any earnings that came out with those contributions are taxable at ordinary income tax rates for the tax year for which the contributions were made/withdrawn).

There are a couple ideas that come to mind:

1. Missing 8606 to reflect the transaction?

2. Deducting contributions (there was no word in the original message if this is Traditional or Roth, and if Traditional, whether or not a deduction was taken for the contribution) would have to be undeducted.