Excess Contibrution Problem Updated
Here is the problem (posted yesterday) in more details and with corrections:
Person had AARP mutual fund and was told by them that the fund was to be closed out and that his money needed to be moved.
It was about $40,000 total all listed on one statement. He didn’t notice that only 10,000 of it was IRA money and 30,000 was non-IRA money. He asked them to send the money to him and so AARP sent two checks, one for the $10,000 and one for the $30,000. Within the 60 days he put the whole 40,000 into an IRA with HD Vest–this was in Aug 2010.
In july 2011 he was doing his taxes (had filed an extension) and his tax guy wondered why he got a 1099b for $30,000. They looked into it and realized they had an excess contribution. So the owner had HD Vest send him all the money. (why all the money and not just the 30,000 I dont know). Then in 2012 he received a 1099R for the whole $40,000 as if it was all a regular IRA distribution.
He has tried to get HD Vest to reissue and show that the $30,000 was an excess contribution correction but they refuse, saying because he didn’t tell them the problem before hand, they won’t do anything about it retroactively.
So we are wondering what is the best course of action to avoid extra taxes.
Thanks again,
Lee
Permalink Submitted by Alan Spross on Thu, 2012-08-16 16:50
With most institutions, the older the problem is the more costly it is to correct it. And the more costly it is to correct it, the less likely the institution will cooperate unless the error is 100% their fault.
If the person has no evidence of clearly requesting a return of an excess contribution of 30k and just asked for a distribution, there would be no earnings calculation and of course the 1099R would not be coded for a corrective distribution. If this is what happened, he will probably have to take the matter up with the IRS since HD will not re issue the 1099R.
However, if he clearly asked for HD to correct an excess contribution for 2010 prior to 10/17/2011 and they erred, then he should pressure HD to revise the 1099R to two 1099Rs (one to include earnings with the 30k coded “P”, the other for 10k reduced by the amount of earnings in the P coded 1099R), and delay the 2011 return until these are issued, but not beyond 10/15.
More likely, he will have to take his case to the IRS due to HD holding firm.
He might proceed to draft a letter to the IRS including all documentation to show how the excess contribution occurred (the 1099B, copies of the two checks, HD Vest statement showing receipt of IRA contribution etc) to go with an amended return for 2010 including the 5329 for the excess contribution (6% of 30k). I assume the original return correctly included the 1099B Sch D redemption of the 30k from AARP and the IRA rollover of 10k. The 2011 return will also include a 5329 showing the distribution of 30k and that will eliminate the 6% tax for 2011. Line 15 should show 40k on 15a, 10k on 15b (unless he rolled over the 10k and that’s yet another problem). On the dotted line in line 15 enter “see letter attached” and the letter will indicate that tax was already paid on the 30k, it was never an IRA contribution or deducted on a prior return and it was accounted for in 2010 Sch D. As such when the excess of 30k was distributed and included in the 40k 1099R, there should be no tax due on 30k of the distribution.
His tax preparer may wish to modify the above as required by his tax software.