Roth early distribution mistake
Individual took an early distribution on their Roth IRA( principal only) in 2007. They are now getting tax notice from IRS. I suspect they did not file their 1099 when they did their taxes in 2008 and the IRS is just seeing it as a taxable distribution from an IRA. How can they rectify this oversight so it will not be coded as a taxable distribution?
Thank you
SC
Permalink Submitted by Alan Spross on Wed, 2009-12-09 17:09
They need to amend the return and attach an accurate Form 8606. To complete the 8606, they must determine how much of the IRA balance at the time of distribution arose from regular contributions, conversion contributions, and earnings. As long as what they removed was less than the balance of regular contributions there will be no tax or penalty. Most people do not keep up a tally sheet so this information is available without time consuming research, so when they take a distribution the reporting results in considerable research. If there is no other way, they could request copies of 5498 forms showing their Roth contributions as far back as 1998. Their custodian could also help if they did not change them too often.
You are correct that even though the IRS has the 5498 forms and could determine whether there is a tax liability or not, they are going to assume an unreported Roth distribution is taxable unless it is coded as qualified. While tax free, this individual’s distribution is still not a qualified distribution.