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The IRS wants to change my 2010 return. They think I owe an additional $4000. They're wrong, but I have a question about one aspect of the issue.

First, they said we failed to report certain dividends. We did. I pointed the "assister" to the precise lines on Schedule B where we itemized them. She said she'd make that correction and will send me a new notice reflecting that agreement.

Second, I did a traditional-to-Roth partial conversion and elected to defer the income until 2011 and 2012. They want to add the income to 2010. The assister told me she didn't have access to lines 20a and 20b of my Form 8606, which lays out this election, so I guess I'll have to write them a letter explaining what their computers should have caught in the first instance. (They also appear to have missed that I have a basis in the IRA, which was reported on Form 8606. Only about two-thirds of the conversion will be taxable.)

Third (and here comes my question), because I had self-employment income in 2010, in addition to contributing $5,000 to my traditional IRA (not deductible -- I was covered by my employer's 401(k)), I also made an employer-side contribution to my SEP-IRA. (Thanks again, pthelander, for that suggestion.) I made a mistake when I reported that contribution, though, reporting it on Line 32 of Form 1040 (IRA deduction) rather than on Line 28 (SEP-IRA etc.). No difference in taxes -- I just reported the exclusion from income on the wrong line. The IRS, unsurprisingly, disallowed the IRA deduction.

What's the best way to fix the erroneous reporting? --Bob
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Normally fix errors on returns you have already filed by filing an amended return. But since you are already in contact with an IRS representative, and it sounds like they are correcting some things on their end, I would ask them what they want.

Jeff
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Third (and here comes my question), because I had self-employment income in 2010, in addition to contributing $5,000 to my traditional IRA (not deductible -- I was covered by my employer's 401(k)), I also made an employer-side contribution to my SEP-IRA. (Thanks again, pthelander, for that suggestion.) I made a mistake when I reported that contribution, though, reporting it on Line 32 of Form 1040 (IRA deduction) rather than on Line 28 (SEP-IRA etc.). No difference in taxes -- I just reported the exclusion from income on the wrong line. The IRS, unsurprisingly, disallowed the IRA deduction.

What's the best way to fix the erroneous reporting?


Since you're writing to provide a copy of the 8606, I'd include the information about the misplaced adjustment to income in the same letter. A copy of the receipts for the IRA and SEP contributions would be a nice addition.

Phil
Rule Your Retirement Home Fool
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For the first two items, I would have recommended writing a letter to the IRS and explaining their errors in reading your return. And I would send copies of the applicable schedules/forms as support.

However, you have a third item - the mis-reported SEP contribution. And I'm torn on that one. That one is your error, not theirs. Normally when the original return is wrong I suggest an amended return. But if you walk through an amended return, the correction won't really show up as everything affecting AGI is compressed into one line.

From my experience, it seems like the folks at the IRS who process amended returns are sharper than those who read and process responses to these notices of proposed changes. And it will take an employee who can understand the larger picture of your return to see that your error makes no difference. So that's an argument in favor of the amended return.

You could write to them, explaining the SEP error pretty much as you did here. Or you could prepare an amended return that has no changes, just an explanation. I'd probably break the conventional rules and actually attach a corrected 1040 to the amended return to show your changes, as that is the only place the SEP correction would be reported.

Either one should work. But I'd have to favor the amended return by a very slim margin.

--Peter
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ptheland writes (in part):

You could write to them, explaining the SEP error pretty much as you did here. Or you could prepare an amended return that has no changes, just an explanation. I'd probably break the conventional rules and actually attach a corrected 1040 to the amended return to show your changes, as that is the only place the SEP correction would be reported.

I reply:

A further thought just occurred to me. I'm a California resident. I'd just as soon not have to do this dance with the Franchise Tax Board. Does that affect your recommendation at all?

Thanks to you and TMFPMarti for your practical suggestions. --Bob
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A further thought just occurred to me. I'm a California resident. I'd just as soon not have to do this dance with the Franchise Tax Board. Does that affect your recommendation at all?

No, it doesn't. The IRS will not send info on changes to your return until the issues are finalized. If there are no changes to your Fed return, there's nothing to share with CA.

--Peter
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ptheland writes (in part):

If there are no changes to your Fed return, there's nothing to share with CA.

I reply:

Thanks again! --Bob
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I got one of those also. Is there a pattern? They state that my IRA withdrawal was a larger figure than I had reported. I have a basis in the IRA, and reported the full amount of the withdrawal, then the taxable amount, which is less.

Is there a pattern here of something the IRS employees are missing?

Best wishes, Chris
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They state that my IRA withdrawal was a larger figure than I had reported. I have a basis in the IRA, and reported the full amount of the withdrawal, then the taxable amount, which is less.

Is there a pattern here of something the IRS employees are missing?


Sounds like a glitch either when the 8606 info was processed for 2010 or when the underreporter analysis was run. If things go as they should at the IRS, by now someone's eyebrow has headed skyward and they're on it.

Out of curiosity, and not that it will help, did you Fools having this problem file electronically or on paper?

In the FWIW column, I did a zero basis conversion to Roth in 2010, which also involves the 8606, and have heard nothing about any missing income. However, since the two-year split was the default if you didn't check a box on the 8606, there's nothing on the 8606 that would affect the bottom line of my 2010 return.

Phil
Rule Your Retirement Home Fool
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I called the IRS, waited about a half hour on hold, finally got a live person.

I told him the amount I reported on line 15a agrees with the amount "rerported to us". He asked me why all of it wasn't taxable. I replied that it is because tax had already been paid on a part of the contributions...

So I will return their form, saying I don't agree with the changes. What is supposed to be supporting documentation? The basis in my IRAs has been handed down, year after year, for decades!

Best wishes, Chris
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I filed on paper.

My Foreign tax credits give the electronic system indigestion and they won't accept my return that way. Or maybe the bunch of K-1s also...

For Bob and me to both get CP2000s on about the same day for the same "error" sounds like a systemic problem of some sort.

Best wishes, Chris
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I got one of those also. Is there a pattern? They state that my IRA withdrawal was a larger figure than I had reported. I have a basis in the IRA, and reported the full amount of the withdrawal, then the taxable amount, which is less.

Is there a pattern here of something the IRS employees are missing?

Best wishes, Chris

==========================================
There definitely was something glitchy in the program for IRAs for 2009 and 2010.

For both years, same clients, got notices about taxable IRA distributions, which were less than the gross/taxable amounts shown, due to Qualified Charitable Distributions (QCDs).

On the paper and PDF copies of the returns the "QCD" notation was next to the (reduced) taxable amounts on page 1. I have to think the data file was transmitted in the right format. So I don't know what gives. We got a matching notice and submitted the substantiation, and IRS went away. But it was kind of a nuisance; and this one of the early matiching notices for we were talking about earlier.

Bill
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TMFPMarti writes (in part):

Out of curiosity, and not that it will help, did you Fools having this problem file electronically or on paper?

I reply:

The hardware I used for my calculations was Ticonderoga, version 2, supplemented by original issue wetware. The printer was a Bic. --Bob
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I just saw one for one of my clients. IRA was rolled over from one custodian to another. Marked "rollover" in the margin next to line 15. Showed the total distribution and the taxable amount. (She had a couple of other IRAs with normal distributions). The 1099-R had the code G in box 7. Everything looks perfect.

This part of the matching program is well and truly screwed up. The notice didn't even have the right amount of taxable distributions per the return. It was off by exactly $1000.

I'm tired and my inhibitions are much lower than usual. I wanted to pick up the phone, call the IRS, and just start screaming at them for being so stupid. However, I managed to rein in that part of me and instead wrote a mostly polite letter asking them to rescind their proposed changes.

Mostly polite.

--Peter
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The hardware I used for my calculations was Ticonderoga, version 2, supplemented by original issue wetware. The printer was a Bic.

As I mentioned before, I was just feeding my curiosity and taking a stagger down memory lane to when a large part of my job involved finding the answer to "WTF happened?" when things went awry. Since both you and Chris filed on paper my focus would shift to, in the following order:

1. The instructions for coding 2010 8606's
2. The instructions for transcribing coded 2010 8606's
3. The programs which processed transcribed 2010 8606's

The feeling that somewhere in this sequence is where the problem happened is heightened by the fact that my e-filed 2010 with an 8606 generated (so far) no incorrect inquiries from the IRS.

Phil
Rule Your Retirement Home Fool
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Out of curiosity, and not that it will help, did you Fools having this problem file electronically or on paper?

Mine was prepared using Lacerte, checked by wetware similar to Bob's, then filed electronically.

My telepathic link to the software is still not working reliably.

--Peter
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Mine was prepared using Lacerte, checked by wetware similar to Bob's, then filed electronically.

I've seen complaints on the same topic in other forums. I hope by now it's been brought to the attention of the Advocate's office. When that office was established in the 80's (as the Ombudsman) its primary job was to isolate these systemic problems that were giving compliant taxpayers grief and see that they were fixed. Of course, that was before the politicians jumped in to "improve" the office.

Phil
Rule Your Retirement Home Fool
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ptheland writes:

For the first two items, I would have recommended writing a letter to the IRS and explaining their errors in reading your return. And I would send copies of the applicable schedules/forms as support.

However, you have a third item - the mis-reported SEP contribution. And I'm torn on that one. That one is your error, not theirs. Normally when the original return is wrong I suggest an amended return. But if you walk through an amended return, the correction won't really show up as everything affecting AGI is compressed into one line.

From my experience, it seems like the folks at the IRS who process amended returns are sharper than those who read and process responses to these notices of proposed changes. And it will take an employee who can understand the larger picture of your return to see that your error makes no difference. So that's an argument in favor of the amended return.

You could write to them, explaining the SEP error pretty much as you did here. Or you could prepare an amended return that has no changes, just an explanation. I'd probably break the conventional rules and actually attach a corrected 1040 to the amended return to show your changes, as that is the only place the SEP correction would be reported.

Either one
should work. But I'd have to favor the amended return by a very slim margin.

I reply:

I ended up writing the following letter:

This letter will explain our disagreement with the changes proposed to our 2010 federal income tax return. In summary, we disagree with all of the proposed changes and believe that our return as filed correctly states our tax liability.

The proposed changes set forth on page 10 of the Notice flow from two separate proposed issues. First, the IRS wishes to increase our taxable retirement income (reported on Line 15b) from $[omitted] to $[omitted plus additional amount]. Second, the IRS wishes to disallow the $[omitted] adjustment to income reported on Line 32. The first page of our Form 1040 is enclosed for your convenience. We understand that the remaining proposed changes on the return flow from these two changes, so that if our position is correct with respect to those two items, then the IRS has no further disagreement with our return. We discuss the two items separately.

Retirement income reported on Line 15b

Our retirement income reported on Line 15b arose from two separate sources. First, Ms. 63 [my wife kept her maiden number] took a required minimum distribution of $[omitted] from an inherited IRA. As the IRS acknowledges, that distribution was reported as taxable income on our return.

Second, Mr. 78164 converted $[additional amount] from a traditional IRA to a Roth IRA. The IRS now proposes to include the entire conversion as income on our 2010 return. This proposal is error for two separate reasons. In the first place, as reported on Form 8606 (enclosed), Mr. 78164 had a basis in his traditional IRA. The portion of the conversion attributable to his basis (reported on Line 17 of his Form 8606) is $[calculated and reported amount], and in no event is that portion includible as taxable income. Moreover, we elected to include the taxable portion of this conversion in our income for 2011 and 2012 (as reported on Lines 20a and 20b of Mr. 78164's Form 8606). Accordingly, our 2010 return properly omitted all of the conversion income.

Adjustment to income reported on Line 32

The IRS wishes to disallow the adjustment to income reported on Line 32. The adjustment is, in fact, proper, but we reported it in the wrong location. We should have reported the adjustment on Line 28, because it arose from Mr. 78164's contribution as an employer to his SEP-IRA, based on the self-employment income he reported on Line 12 of Form 1040. We enclose Schedule C, demonstrating the self-employment income, and a statement from [Custodian], Mr. 78164's IRA custodian, demonstrating that the amount in question was contributed in Mr. 78164's capacity as his own employer.

In short, although we agree that the $[amount omitted] should not have been reported on Line 32, it should have been reported instead on Line 28. When these corrections both are made, the total adjustments to income reported on Line 36 of our return will remain unchanged. Accordingly, our adjusted gross income was correct as reported, and therefore our tax liability was likewise correct as reported. We therefore request that you withdraw the Notice of Proposed Changes.

Thank you for your attention to this matter. We look forward to your response.


It worked. They accepted our position in full. Thanks for the help. --Bob
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It worked. They accepted our position in full. Thanks for the help.

You are very welcome. And that was an excellent letter you wrote. Quite lawyerly.

--Peter
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