Usually, I post Ask The Reader questions on Monday. However, my current situation calls for some urgency, so I’m getting this one out now. Also, it’s a bit of a rant and Thursdays were traditionally my day to complain.
UPDATE! Thank you so much to Eric Bowlin, Danny the Pizza Guy, Rob, freddy smidlap and and Fiery Millennial Gwen who all encouraged me to call the IRS. I did just that and the IRS couldn’t have been nicer about the issue. The representative stated that there had been an error on their side and dismissed the issue. Phew.
Up until very recently, I’ve had a fine relationship with the IRS. I pay my taxes and file my return. End of story. See you next year Mr. Tax Man. I’m sad to report that our relationship has soured.
IRS Mess Stress
A couple weeks ago, I started getting robocalls stating that I owe the IRS money. The creepy robotic voice on the other end would say something like this:
You owe the IRS money. If you don’t return this call with 24 hours, you will be arrested. Blah, blah, blah…
Whatever. I know that these calls are scams. If the IRS wants to get a hold of you, they send a letter.
But then, I received a letter. From the actual IRS. And it wasn’t good.
Unwelcome Correspondance
I opened the IRS envelope without much worry. I had received notes from the IRS some years ago after an incompetent accountant botched my taxes. I figured this was just another accountant error. But it wasn’t.
The letter explained that in 2016, I had taxable income that I didn’t tell the IRS about to the tune of $150,000. The income was reported by Vanguard in the form of a 1099-R.
A 1099-R is used to report a distribution from a retirement plan. I had taken a distribution, but it went to another qualified plan when I rolled over a 401(k) to another 401(k).
My first thought was that Vanguard had messed up the 1099-R. I looked at Box 7 of the form which specifies the type of distribution. It had the letter G which translates to this:
Direct rollover of a distribution (other than a designated Roth account distribution) to a qualified plan, a section 403(b) plan, a governmental section 457(b) plan, or an IRA.
Vanguard had it right:
I then looked over the documentation from when I rolled over the 401(k). Everything was correct; all of the tax ids were good, the checks were made out to the new plan (not me), on and on. I couldn’t find any errors.
I had an accountant review everything to make sure I wasn’t missing something. He confirmed that everything looked good.
The Scary Part
I’ve spent many hours digging up documentation to prove my case. But the thing that scares terrifies me is that I’ve had to deal with any of this at all. The 1099-R clearly shows that the distribution was a rollover. What am I missing here? Is this just a clerical error that will be dismissed once the IRS sees my documentation?
2016 was the highest income year of my life. I had topped out at my job and Mrs. 1500 had started working again. Our income was over $200,000. If the IRS comes to the conclusion that I have to pay taxes, I’ll owe about $50,000 plus penalties.
I’m probably worrying too much. Maybe these errors happen frequently. Maybe the IRS computer was just having a bad day. I hope so.
Has the IRS ever botched something with your tax return? If so, was it resolved?
The IRS is not perfect. (haha).
I found that a good accountant has contacts at the local IRS office and can get someone on the phone pretty quick to get answers. I’ve had a number of things resolved with quick phone calls, including once when I had to fire an accountant because he missed the October filing deadline for extensions!
I didn’t get any fines at all with a simple phone call.
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Hmmm, I never thought about calling them. Thanks for the suggestion. I’m also going to ask my accountant about contacts.
The tax department totally makes a lot of errors. As long as you respond within the deadline, with the appropriate detail, you’ll be fine!
So stressful even to see that envelope in your mail. That’s because you’re honest.
Thanks Ramona. I’m sure I’ll win in the end because I did nothing wrong, but I guess I fear the process. I don’t have time to deal with this.
Mail from the IRS is always terrifying. We got a letter recently for my teenage son, and I was scared to open it. Luckily, it was just a confirmation that they got his amended return. Phew.
I hope your situation works out with no money out of pocket!
Thanks Kristen! I’m glad your letter was less terrifying than mine!
Oh yeah, the IRS can mess up information from time to time. Amazing how a simple code on a tax form can change the outcome of your situation 🙂
I actually had my boss put a notice on my desk this week for a partnership that has a $25K bill for failure to file on time. To keep a very long story short, we originally paper mailed an extension and had a return receipt from the IRS that it was received in time. In our situation we decided to send a letter back with all documentation, given the complexity of the issue. However, I’d recommend contacting the IRS directly in most situations as they can be pretty helpful once you get them on the phone, although this is not a popular decision. They usually will tell you exactly what to do to resolve most issues.
Were you and your accountant able to resolve your issue, or is it still ongoing? If so, how did you contact them back?
The issue is still ongoing. I’m going to mail back my documentation today in a big ass manilla envelope. I wanted to write about it here first in case anyone had good suggestions.
It sounds like you and your accountant are going about it the right way. As long as you have all documentation proving your case, you should be good. I’d recommend sending it with a return receipt on that envelope so you know if the IRS receives it or not. That and you’ll have a record of it should anything unusual happen. This helped us big time with our situation above.
I frequently get IRS notices. So far it’s always been their fault, knock on wood. Luckily the notices have always been for small amounts despite big numbers on my tax return. I often just pay them rather than waste my time correcting them.
Your case sounds weird. How could they mess up on something so basic? I’d be diligent but not worry about it. They’re pretty reasonable. When I do bother to fight I’ve won each time.
Also be thankful you’re not in California. I get notices from the California Franchise Tax Board too. It’s impossible to ever communicate with them because their lines are so busy you can never get through. Think waiting for 2 or 3 hours and then getting disconnected over and over. Often they are so busy they don’t even let you hold . So I pay for their mistakes year after year. They charge me for non-existent penalties.
It’s good, from my perspective anyway, to hear that other people have to deal with issues like this. Thanks for sharing.
“Your case sounds weird. How could they mess up on something so basic?”
I know, right? This is what bothers me too. It’s so damn simple.
And yeah, we’ve thought about buying property in California, but I’ve heard horror stories similar to yours. No thanks.
I must have not knocked on wood hard enough. I just received another IRS notice today. LOL , there goes another few days of my time. This is after sending them tax payments of $400k for 2017!
OK, I take that back about communicating with the IRS. My notice said that my tax filing for my 5 year old daughter did not include an original signature and all the attachment forms required for substantiating the 1040. They thought that a copy of my tax return that I submitted as proof of repayment for Obamacare premium tax credits, attached with her return, was the main return I was submitting for my daughter… IRS is brain dead.
This time a phone call got routed through a deep menu, and results in a hang-up every time at the end of the menu selection process. LOL, glad I am early retired so that I can make tax filings and IRS communications my full-time job. Hope it doesn’t turn into your full-time job as well.
I have the same fear if an IRS envelope hits my mailbox. I had a couple of envelopes come recently and thankfully had nothing.
In my experience calling them is always surprisingly helpful. You will probably still need to mail in the backup but your documentation seems spot on.
Thank for the suggestion. I’ll get a hold of them before I mail my documentation in.
IRS makes mistakes all the time. Back in about 2010 I claimed the American Opportunity tax credit to the tune of $2,500. I was working full-time and getting my Master’s. I was also in the process of getting my CPA. The letter came from the IRS saying I needed to pay back the $2,500 credit plus $128 in interest because I didn’t pay for tuition that year.
I calmly went to my online bursar site, printed my payment confirmations, sent them the letter. They replied back saying, nope you still owe us even though I sent them proof. So I then sent the bursar information, plus copies of cancelled checks, and another letter saying “you guys are nuts – READ MY SUPPORT” (not really but you get the idea). Finally they sent me a letter back saying I owed nothing. It was a process, so be ready. But you’ll get it figured out in the end.
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Thanks for sharing FF. I’m gearing up for the battle.
Hooray to winning a car on TPIR!!! My taxes were all messed up that year since I just put the market value in my 1040 not the 1099 value. Then had to fight with them, and actually go into the office.
I was right, they were wrong. I filed it wrong and had to amend my 1040. But what a hassle. No reason the be scared… they’re more incompetent than you give then credit for. Just make sure your ducks are in a row.
Thanks Mr. WoW. My ducks are definitely in a row, but it has taken a lot of time to get them there…
Ha, yep. Years ago, my husband withdrew money from and old Traditional IRA to buy our first residence. About a year after we had moved into the house, we got a letter from the IRS. The IRS said that he owed taxes on that money (which typically he would). BUT, my husband had already paid taxes on the money years before that, because one year he had made too much income, but had already contributed to the IRA. So, he had paid taxes on it already. But the IRS was trying to say he owed taxes on it still.
My husband STILL TO THIS DAY talks about how he called up the IRS and said, “Nope, you’re wrong,” and the IRS pulled up some records and they were like, “Oh, yep, you’re right. We’re sorry.” (Of course, that’s a gross oversimplification, but in reality it was still fairly short and simple). The IRS folks were also very polite and helpful.
i had to pay back taxes once and they were surprisingly not unpleasant to deal with. i think you can call them too.
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Huh, that’s strange. I guess they make mistakes too. Your paperwork looks good so don’t stress out too much. Keep us updated.
Did you roll over to a nonstandard plan?
It’ll work out in the end but you may have to jump through some hoops. It happens. This is why you keep documentation.
I’ve had similar letters twice over the last five years. I faxed in my paperwork showing the both ends of the transfers and weeks later, I got an OK, you don’t owe anything letter from the IRS. As I understand it, they are working with very old technology ans systems. I would expect this to get worse as time goes on,
I’d put a few Colorado beers in that big ass manilla envelope just to make sure everything goes smoothly.
Had the same issue with my wife’s old IRA rollover from 2016. Because of my “fear” of the IRS, I had my accountant follow up. It took three rounds of providing the needed proof and then it was finally resolved. My accountant billed me $160 for her time. Next time I will know to handle myself.
Definitely call the IRS before mailing anything. They’re surprisingly helpful!
I called and it’s resolved! #phew
I’m fully expecting a nice little letter next year regarding a couple rollovers my wife and I did. It was a bit challenging in that we couldn’t (easily) do the direct rollover so we did withdrawals and than deposited the funds into the new qualified accounts within a week. My understanding is there is not issue as long as these transactions are done within 60 days from start to finish, qualified to qualified, regardless of what special code is in that box.
Sounds like it’s since been resolved for you. I hope my likely interaction goes just as well…
-Jon
Was audited twice… Once for under $100, I was a 1099 contractor at the time and didn’t feel like digging out old paystubs so I just paid it. Another time, the cost basis for a $10k-ish stock trade was missing so I mailed back the transaction history to avoid back taxes on $10k income.
I don’t really worry about audits. They give you plenty of time to respond, and IRS agents have been friendly IMO.
I read that IRS computer code still runs in Assembly language and the data is stored on magnetic tapes, so it’s kinda surprising audits don’t happen more often.
I see this in my office a lot when people file their own return. There are actually special codes on the tax software 1099R screen notifying the IRS computer what it should already know. Reminding the IRS this is a rollover is required because the 1099R states the distribution, but sometimes gets messed up with the 5498 issued in mid-May. The IRS admits to the issue involving Form 5498. In a few decades the IRS will modernize to cutting edge 19th Century technology. Can’t wait.
I worked for a company in upstate NY for 2-3 months, and was part of the team moving the company to NJ. They purposely hired people to go to NY to train knowing they were moving. Only they didn’t update their address right when they moved. So I told the IRS I worked for a NY company for 3 months and then listed them as based in NJ. There are reciprocal taxes because so many people live in NJ and work in NY. But the IRS thought I was trying to get away with something. I know they were cool with my answer once I explained the situation, and maybe I had to update the return with a more accurate date for it being an NY company. It was smooth (after my initial panic of getting an IRS letter) & easy to resolve. Hope yours is/was too.
I received a paper audit notification a few years ago. I was quick to file my federal taxes once I received all my documentation. Unfortunately, my brokerage firm sent corrected 1099 forms about three months later. Afterwards, I received a notice about an unreported trade. I sent in my documentation with the appropriate payment amount and never heard from the IRS again. Thank goodness.
Just don’t ever get divorced and then have to deal with an unreasonable ex-spouse who despite yourself taking ownership of a very underwater property due to the great financial crisis demanded a portion of the mortgage interest deduction and you have to “split it”.
Talk about nightmare.
The IRS folks (with court documents in hand) were actually quick to sort it out via taxpayer ID and the additional information. It just sucks IRS contacted happened 3 years AFTER all the drama because that was fun to have to “reconnect” via the IRS.
You just triggered PTSD, thanks for that lol.
I’ve gotten letters twice.
Once was related to the year I made partner. I had made a mistake with all the new forms. Owed a couple hundred dollars. Whatever, Lesson learned. $200 was cheaper than paying an accountant.
The other time my HSA distribution got marked as non-qualified. It was qualified. My HSA company said so, as did the forms I filed with the IRS. Not sure where they got that from. However, that extra ‘income’ that wasn’t income knocked me over the cutoff for student loan deduction. So they disqualified that too. And then of course the interest penalties. They said I owed somewhere around $2200. Wrote a one page letter, sent in copies of all the relevant forms. Month later got a letter saying, essentially ‘You’re right. Sorry to bother you’
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Glad everything worked out! I got a letter this year too – but I did mess up my taxes… Luckily the from I missed (like an idiot) was part of my healthcare refund so I got a little extra back.
Still scary. Next time I’ll give them a call!
I had a similar situation where the IRS made a mistake and tried to get me to cash several refund checks. Fortunately I had sent them back along with my explanation of their mistake, and documented everything. Later, when they corrected the mistake, they sent a new letter saying that I owed them for the amount in the refund checks, plus interest. I called them and was able to resolve it.
For political reasons, the Congress has cut the IRS budget every year for several years now. Consequently, IRS has cut customer service agents and cannot bring their computer systems into the late 20th century. Unfortunately, the enforcement side of the shop also suffers from a reduced ability to… ahem… encourage taxpayers to pay the actual amount due. This leads to reduced taxpayer compliance, which hurts us all. Not cool, Congress.
Here’s what the last IRS commissioner said when he departed: https://www.washingtonpost.com/news/powerpost/wp/2017/11/07/irs-chief-departs-blasting-congress-for-budget-cuts-threatening-tax-agency
Bah, that’s a bummer.
I have new respect for the IRS based on my experience, your comment and some of what others have said. We live in a great country and our taxes aren’t large. And then, we have great tools like 401(k)s to pay even less taxes. Life is good. And IRS, I’m sorry if I said anything mean about you. Carry on.