2016 Retirement distribution counted as income when it wasn't

[Platocat]

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!

[Lisa995]

Did you include the IRA contributions on the return so that it would generate a Form 8606 showing that the contributions were non-deductible? Review your 2016 return and see if the Form 8606 was included in the filing.

[Platocat]

Yes, I have an 8606 form for 2016 showing I have a non-deductible contribution of $5500 and also an 8606 for 2015 showing the same amount. I made the $5500 traditional IRA contribution for both 2015 and 2016 in late March of 2016.

I am thinking the IRS either did not see the 8606 included in my 2016 tax return or did not receive the 5498 from my financial institution showing the full $11,000 was converted to Roth IRA in 2016.

Thank you for your reply. Any other thoughts would be much appreciated before I dispute this with the IRS. I am planning on submitting the 8606 for years 2015 and 2016, along with all the 5498 forms for 2016 (there was one generated for the traditional IRA and one for the Roth).

Aside from a written explanation, do I need to include any other forms?