Roth IRA Conversion not reported on 1040-2010
My client forgot to put his 100K IRA conversion to a Roth on his 2010-1040, can he amended
his 2010 tax return and spread the tax to 2011 and 2012?
My client forgot to put his 100K IRA conversion to a Roth on his 2010-1040, can he amended
his 2010 tax return and spread the tax to 2011 and 2012?
Permalink Submitted by Alan Spross on Tue, 2012-04-24 18:01
Yes. If he converted in 2010, the default rule applies the conversion income ratably to 2011 and 2012. While many 8606 forms can be filed by themselves, in this case where two additional tax years are affected, it would be better to file the 1040X and include the correct 8606 with it, even though it will not change the taxes due for 2010.
He should report half the 2010 conversion income on line 15b of his 2011 1040 and the same for 2012, assuming he did not take out any of the 2010 conversion money prior to 2012.
Permalink Submitted by Alan Sheldon on Mon, 2012-04-30 09:35
I have a similar situation except that a notice CP2000 was sent. On P. 5, under “1. Information Reported to IRS which differs from the amounts shown on your return” it shows a 1099-R, distribution code 7. On P. 9, the chart proposes the additional tax on the full unreported 1099-R amount, an accuracy-related penalty citing IRC Section 6662(a), and interest. The chart also proposes a reduced Making Work Pay credit (it doesn’t say why, but I figured out that it was due to the additional income from the Roth conversion all being in 2010 rather than being divided between 2011 and 2012). Half of the 2010 conversion amount was reported on the 2011 Form 1040, Line 15b, but a 1040X and 8606 reflecting the converted amount have not been filed. The 2011 return was filled out [i]as if[/i] the conversion was reported in 2010 with the half conversion amounts on 2010 Form 8606 lines 20a and 20b. In fact, it was accidentally not reported: the 2010 1040 “IRA Distribution” line is blank and no 8606 was generated. A worksheet reflecting what should have been on the 2010 8606 (had it generated) is at the end of the pdf of the 2011 return and was presumably e-filed. The worksheet is titled “Roth Conversion/Rollover made in 2010 and deferred until 2011 and 2012”.
On the CP2000 response form, we want to check Option 3 (“I Do Not Agree with Any of the Changes”) and attach a copy of Form 5498 2010 (which shows it was a Roth conversion) as documentation. Not sure if it is necessary to send a copy of the 1099-R since they obviously already got that information but figure it couldn’t hurt. Not sure whether we should give a reasonable cause in a letter of explanation and point out that if the presumed filer preference/default rule applies the income ratably to 2011 and 2012, then no additional tax than what was already paid for 2010 would be owed. I hope that fact and the fact that an amended return would eliminate the additional tax makes abatement of the accuracy penalty and interest a slam dunk regardless of whether they find the cause for not reporting the conversion reasonable or not. In the letter, should we formally request that 2010 tax not be increased and that the proposed accuracy penalty and interest be abated for reasonable cause or is that request already clear from checking Option 3 (do not agree with proposed changes)? Seems like it couldn’t hurt even if superfluous.
I think alan’s advice to erigby to file an amended return and 8606 together makes sense in this case as well. I wonder whether we should file them [u]before[/u] responding to the CP2000 notice and mention that in the response? Send filled-out 1040X & 8606 forms to them [u]with[/u] the CP2000 response? Say in the letter we are prepared to file 1040X & 8606 if necessary and “please advise”, i.e., offer to file? If the examiner’s decision goes our way but they don’t say to file a 1040X and 8606, then don’t bother filing them? Or file anyway? I think the correct action is to file anyway unless told no further action is required. Thank you for any insight into the above.
Permalink Submitted by Alan Spross on Mon, 2012-04-30 17:58
I would file the 1040X and return it with response to the CP 2000.
This a copy of Sec 408A(d)(3):
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3) Rollovers from an eligible retirement plan other than a Roth IRA
(A) In general
Notwithstanding sections 402 (c), 403 (b)(8), 408 (d)(3), and 457 (e)(16), in the case of any distribution to which this paragraph applies—
(i) there shall be included in gross income any amount which would be includible were it not part of a qualified rollover contribution,
(ii) section 72 (t) shall not apply, and
(iii) unless the taxpayer elects not to have this clause apply, any amount required to be included in gross income for any taxable year beginning in 2010 by reason of this paragraph shall be so included ratably over the 2-taxable-year period beginning with the first taxable year beginning in 2011.
Any election under clause (iii) for any distributions during a taxable year may not be changed after the due date for such taxable year.
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Advise the IRS that (iii) above applies since you did not file an election to include the conversion income shown on the 5498 (send copy) in 2010 income and by default the income will be reported 50% on your 2011 return and 50% on your 2012 return.
That should take care of all the other proposed assessments as well. At this point the IRS probably did not consider the 1099R as anything different than a distribution not rolled over, ie they do not know you converted, despite the 5498.