In 2016 my husband and I each contributed $5500 toward our respective IRAs and shortly thereafter did a Roth conversion for the full amount. The IRA contributions were nondeductible because of our combined income, and the money was made with after tax dollars. There was a 1099-R form generated by our financial institution that was sent to IRS, along with form 5498 showing the Roth IRA conversion amount. My understanding was that since the traditional IRA contributions were made with after tax dollars, I shouldn't have additional tax penalty when we did the Roth IRA conversions.
Fast forward to today, I received notification from IRS that the $11,000 ($5500 each for my husband and I) should have counted as taxable retirement income, thereby increasing the amount of tax we owe for 2016 to roughly $4000 (included interest). Can I dispute this by sending the IRS the form 5498 for 2016? Can I correct that I shouldn't have additional tax penalty since the traditional IRA contributions were made with after tax dollars and the entire amount was converted to Roth IRA? How do I prove the contribution was made with after tax dollars? The money came out of our savings account, of which I can probably get a record of, to send as part of documentation to IRS.
Thanks in advance for any help provided!
