Retirement tax questions

Regarding #1,

If you can get broker B to accept your explanation that this was a rollover, and get them to issue a corrected form 5498, that should alleviate any issue you have with the IRS.  Did you also make contributions, meaning that the IRS now thinks you have excess contributions for 2022?  If you can't get the 5498 corrected, you will likely have to pay a penalty for 2022 and then remove the excess to avoid future penalties.

Regarding #2,

I am going to recruit @dmertz  to discuss your options regarding your son's Roth IRA contributions.

As I understand the regulations:

1. For 2019, your son has an excess contribution and needs to file an amended return to pay a 6% penalty on the excess contribution.  (Note that statute of limitations is 3 years from the date he filed, or 3 years from the filing deadline, but there is no statute of limitation if he didn't file a tax return.  If he did file a 2019 tax return on time, and didn't pay the penalty, and the IRS has not sent an adjustment notice, you might get away with not correcting the error.  You may want to back that up with your own professional advice.  

2. Going forward, did your son at any time have compensation from working, and did he continue to make Roth IRA contributions?  He can use his present eligibility to "use up" prior excess contributions.  For example, suppose that in 2019, he contributed $3000 but had no compensation from working.  In 2020, he had $10,000 in compensation from working and contributed $5000 to a Roth IRA.  Because the 2020 limit was $6000, $1000 of the prior excess is absorbed by the unused 2020 limit, so on his 2020 tax return, he would report and pay a 6% penalty on only $2000 of excess.  However, if he did not have compensation from working, then any contributions were not eligible, and if he had compensation but contributed the full $6000, there is no extra room that can absorb the prior excess.  

3. Your son needs to recalculate his excess Roth IRA contributions for 2020, 2021 and 2022, and prepare amended tax returns that include a penalty calculation on form 5329.  Based on his contributions, and his compensation, the excess might be constantly increasing, or it might be decreasing.  Whatever the excess is, is assessed a 6% penalty.  It is too late to make any corrective distributions or withdrawals for 2019-2022.

(For example, your son contributed $6000 in 2019 with no compensation.  The excess for 2019 is $6000 with a 6% penalty.  Your son contributed an additional $6000 in 2020 with no compensation. The excess for 2020 is $12,000, subject to a 6% penalty.  Your son contributed an additional $6000 in 2021 and had $4000 of compensation from a small job. The excess for 2021 is $14,000, subject to a 6% penalty.  And so on.)

Also note that if he files amended returns for 2019-2022, reporting that he owes additional tax due to the 6% penalty, the IRS will likely come back and ask for interest because he is paying his taxes late.  It's a variable APR, around 4-7% depending on the month.   

4. For 2023, if your son withdraws his current amount of excess contributions before December 31, there will be no additional penalties calculated on the 2023 return.  The penalty is based on the amount of excess contributions in the account as of the end of the year, so if he withdraws them, there is no further penalty.  But this also needs to be reported and calculated in the tax program on form 5329.

Withdrawal of Roth contributions is never taxable.  Withdrawal of earnings is taxable before age 59-1/2, but there is no need to withdraw earnings here.  Suppose your son made full contributions for 2019-2023 that were all considered excess, that's $30,000.  And suppose the account balance is currently $36,000 due to market growth.  He only needs to remove the $30,000 that is considered excess contributions--and this is non-taxable--and he can leave the earnings to grow.  (But, you need to prepare the amended returns for 2019-2022 so you know what the excess will be in 2023.)  If he also withdraws the earnings, they are subject to income tax plus a 10% penalty if under age 59-1/2.

(And of course, in this example, any earnings that can be left in the account will be offset by the accumulated 6% penalties.)

Can you reduce the penalties by hiring a professional to negotiate a lower amount with the IRS?  I don't know.  My guess is the amount your son will owe won't be large enough that you can entice the IRS with an offer in compromise.  But it's up to you if you want to try.