CP2000 - "Retirement Income" but was converted

[daydreamer]

Hi - I received a CP2000 from the IRS stating that I have "retirement income".  This was $6K that was placed into a traditional IRA and then quickly moved to a Roth IRA.  What do I need to send to the IRS to show that it was converted?

I did have an 8606 as part of my TurboTax filed return.  It shows $6K in line 1 and $6K in line 2.  I think the line 2 is incorrect as the traditional IRA does not have any balance.  But then wouldn't TurboTax have calculated the tax impact (incorrectly)?  Wondering why the IRS is showing that I need to pay more taxes.  (Over $2K more)

[Opus 17]

In the year that you did this, did you report a non-deductible IRA contribution using form 8606?  If not, the IRS will assume the rollover was from a deductible IRA account and want the tax.  Was this your only balance in a traditional IRA (combining all balances in any traditional IRA accounts at different brokers into one balance)?

[daydreamer]

Yes, 8606 shows $6K as non-deductible (Line 1)  But the form also shows another $6K on line 2 (which I think is incorrect as I have no ongoing balance in a Traditional IRA.

8606 was part of my return and now I have a notice saying that i did not report the $6K as income but others have (referencing Vanguard 1099-R).  

Shouldn't the 8606 form have shown that it wasn't income?  

[Opus 17]

Do you have suggestions, @dmertz ?

@daydreamer ,

I can't explain line 2 of form 8606 unless you told turbotax something incorrect.  The program won't know about a prior non-deductible basis unless you told it yourself, or carried that information over from a prior year.  Did you have a form 8606 in the previous year?

Then, if you did the conversion, that would be reported on line 8.  Line 11 is the non-taxable portion of the conversion, if you did a true backdoor Roth, that should be the full $6000, and line 14 (your new basis in traditional IRAs going forward) would be zero (unless you had a prior basis you did not convert).

However, you would also get a 1099-R for the distribution of $6000 from the traditional IRA and that also needs to be reported. It would show up on line 4a as the total amount of distribution, and the taxable amount (which should be zero) will be on line 4b.  If you didn't report the 1099-R, and show the paperwork that it is not-taxable, the IRS is allowed to assume it was taxable and send an assessment notice (although you can rebut this with a letter if you get the paperwork straightened out.)

It's difficult to evaluate without being able to see your tax return.  You can try calling Turbotax customer support.  Their current policy is that if you need tax help (instead of technical help with the program) they want to to pay extra, but they might be more accommodating at the slow season.  Or you can work with us here to help us understand what you did, but we can't see your return so you will have to help us out. 

[daydreamer]

@Opus 17 Thank you for your help!

It definitely appears that the 8606 form generated by TurboTax is not correct as it lists another $6K in line 2 and then a total of $12K in line 14.  

Not sure what has happened with this as even though the 8606 looks incorrect, it looks like TurboTax should have withheld more taxes than it did.  

Regardless, this is my first time being audited.  Do I just respond to the CP2000 with a revised 8606 form?  Or are there any resources you would recommend on how best to respond to the IRS?  

[dmertz]

It would would have been helpful for all of the related posts to be kept to one thread.  your other thread indicated that you had made a $6,000 contribution for 2022, so it would seem that the amount on line 2 came from line 14 of your 2022 Form 8606 due to the contribution for 2022 being nondeductible.  Given that your 2023 year-end balance in traditional IRAs was zero, it seems to me that your 2023 tax return is correct as long as the Roth conversion is shown on Part II of your 2023 Form 8606 and the IRS has made an error in claiming that your Roth conversion is taxable.

[daydreamer]

Sorry, I thought it was 2 transactions but it was in fact just one.  So that post was incorrect.  I'm sorry for the confusion.  

[dmertz]

If there was no nondeductible traditional IRA contribution made for 2022 or any prior year that created $6,000 of basis that carried into 2023 (and you did not acquire any such basis from any other source such as the rollover of after-tax funds from an employer plan), line 2 should have been blank.  But that then raises the question, how did you have $12,000 in a traditional IRA to convert?  Was the other $6,000 pre-tax money from, say, a deductible traditional IRA contribution made in a prior year?

[daydreamer]

No, no prior balance.  Only other transaction within the Traditional IRA was in 2020 with $6K moving and then back out to the Roth IRA.  No contribution in 2021.  And then the 2022 with $6K moving in and out to the Roth IRA.  I checked the account directly. 

The 8606 form (generated from Turbotax) shows 

Line 1:  $6K

Line 2: $6K (which should be 0)

Line 3:  $12K

Line 14:  $12K

And my CP2000 letter states underreported "Retirement Income Taxable" of $6K from Vanguard

So it seems that my 8606 is wrong (assuming I made an error while working through Turbotax), but then shouldn't I have overpaid if the 8606 is overstating my distribution?  

Do I just respond to the CP2000 with an updated 8606 form?  

[dmertz]

It appears that you failed to report the Roth conversion.  With the Roth conversion reported, line 14 would not be equal to line 3 and Part II would have been completed.