recharacterization

Submitted by Don Warnke on Wed, 2021-01-20 13:50

Couple made RIRA contributions in 2018. while completing their tax returns in early 2019 the CPA informed them that they had made too much to make RIRA contributions so in April 2019 the opened TIRA and requested recharacterization of 2018 RIRA contributions to TIRA.
The custodian issued form 5498 in 2020 for tax year 2019 showing RIRA recharacterizations. Couple has since received notice from IRS that they do not show a TIRA contribution for 2018 therefore the couple owes more taxes.
The couples CPA thinks that the custodian should have issued 5498 for tax year 2018 showing recharacterization even though the transaction took place in 2019 for tax year 2018.
If current 5498 is correct how do we confirm to IRS that this recharacterization on the tax year 2019 form 5498 was to a TIRA for tax year 2018?



Submitted by Alan - IRA critic on Wed, 2021-01-20 16:05

Several issues here. It sounds like a TIRA deduction was claimed on the 2018 return, yet normally at least one spouse is covered by a workplace plan, meaning that if their MAGI is too high for a Roth contribution, it is also too high for a TIRA deduction for either spouse. If more taxes are owed, that suggests that TIRA deductions were claimed on Form 1040 when they were not eligible for deductions. For 2018, there should either be a deduction or more likely  Forms 8606 filed to report non deductible contributions for each spouse.  Proper recharacterization 1099R/5498 forms should also be issued by the custodian so there is no conflict with the tax return. The CPA should also have included an explanatory statement regarding the contributions and recharacterization with the 2018 return to help guide the IRS away from the original 5498 forms.
Recharacterization related forms would be a 2019 1099R for the Roth IRA recharacterization coded R, and a companion 5498 issued for the TIRA showing the recharacterized transfer in Box 4. Based on the date the recharacterization is made, this 5498 may be either a 2018 or 2019 5498.  The IRS may or may not be coordinating the 1099R/5498 forms with their conclusion to deny a TIRA deduction for 2018.
 

Submitted by David Mertz on Wed, 2021-01-20 16:27

Since it’s the 2019 Form 5498 that shows the recharacterization contribution to the traditional IRA, the recharacterization was apparently done in 2019.  If so, the 2019 Form 5498 is correct and it’s also correct that no 2018 Form 5498 shows the recharacterization contribution.  No matter when you did the recharacterization, you would also have a 2018 Form 5498 from the Roth IRA showing a regular Roth IRA contribution.
It’s possible that because an IRS examiner saw no 2018 Form 5498 reporting a regular traditional IRA contribution that the examiner mistakenly concluded that there was no traditional IRA contribution made to support the claim on your 2018 tax return of a deduction for a traditional IRA contribution.  If you used software to prepare your 2018 tax return, this scenario seems more likely than the IRS determining that a traditional IRA contribution that they believe that you made was simply nondeductible.
To head off a mistaken belief by the IRS that no traditional IRA contribution was made for 2018, your 2018 tax return was required to include an explanation statement regarding the recharacterization.

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