Letter from IRS to submit 2021 1040X after sending in 2021 8606 & explanation of Backdoor Roth IRA conversion

[NigelSalad]

Hello Tax Experts, 

I received a letter from the IRS requesting I submit a 2021 1040X that I think is in response to the Backdoor Roth IRA explanation and 2021 8606 I mailed in. I wasn't expecting to have to submit a 1040X for 2021 since the 1099-R code R I received in 2022 shouldn't affect my 2021 1040 according to these two posts, which are similar to my case. 

• Got three 1099 R after I recharacterized... 
• Question about Roth recharacterization... 

For context, I've included the letter from the IRS, the Backdoor Roth IRA explanation, my 1099-Rs, and my 8606s. Did I do something incorrectly? Do I need to amend my 2021 1040? If so, is it as simple as putting "4a. $6,684.76 " and "4b. $0" for my 2021 1040X (see Roth IRA 1099-Rs)?  I plan on uploading amending/filing through TurboTax, but wanted to make sure I'm doing the right thing first.

Thank you so much for your help!   

Letter from the IRS

Taxpayer ID: ...

Tax period(s): Dec. 31, 2021

Form: 1040 

Body:

"Dear Taxpayer:

Thank you for your correspondence dated Mar. 31, 2023.

Information you sent indicates you should file Form 1040X and amend the original return."

There's nothing else in the letter of importance. They included a 1040 form and a phone number. I called the phone number, but the agent would not tell me what on my 2021 1040 needs be amended. 

Backdoor Roth IRA Explanation

Recharacterization and Conversion of 2021 Roth IRA Contributions

Date(s) of the Original Contribution: 1/21-12/21
Total Amount Contributed to Roth IRA: $6,000
Date of Recharacterization from Roth to Traditional: 2/10/22

Amount Recharacterized to Traditional IRA: $6,684.76
Date of Conversion to Roth IRA: 2/14/22
Amount Converted to Roth IRA: $6,468.52

Explanation: In 2021, I contributed directly to and maxed out my Roth IRA. In 2022, I realized that I exceeded the income limit in 2021 to contribute to a Roth IRA, so I had Vanguard recharacterize my 2021 Roth IRA contributions into a Traditional IRA ($6,684.76). I then did the conversion from my Traditional IRA back to my Roth IRA ($6,468.52). On 3/31/23, I mailed my 2021 8606 to the IRS to show that I have a basis to carry forward to 2022 due to my non-deductible Traditional IRA contributions.

Recharacterization and Conversion of 2022 Roth IRA Contributions

Date(s) of the Original Contribution to Roth IRA:

● 1/4/22

● 2/2/22
Total Amount Contributed to Roth IRA: $1,000
Date of the Recharacterization of Roth to Traditional IRA: 2/14/22

Amount Recharacterized to Traditional IRA: $947.77
Date of Conversion to Roth IRA: 3/2/22
Amount Converted to Roth IRA: $931.90

Explanation: In 2022, I made two direct contributions of $500 each ($1,000 total) to my Roth IRA. I realized that I exceeded the income limit in 2022 to contribute to a Roth IRA, so I had Vanguard recharacterize my 2022 Roth IRA contributions into a Traditional IRA ($947.77). I then did the conversion of these funds from my Traditional IRA back to my Roth IRA ($931.90). For my 2022 tax return, I’ve included a 2022 8606.

Conversion of 2022 Traditional IRA Contributions

Date(s) of the Contribution to Traditional IRA: 3/22-12/22

Total Amount Contributed to Traditional IRA: $5,000

Date of Conversion to Roth IRA: 12/21/22
Amount Converted to Roth IRA: $4,895.73

Explanation: After I erroneously contributed $1,000 directly to my Roth IRA in 2022 (see section above), I correctly contributed the remaining $5,000 of the limit to my Traditional IRA. I converted my Traditional IRA contributions to my Roth IRA on 12/21/22 ($4,895.73). For my 2022 tax return, I’ve included a 2022 8606.

In 2022, I received two 1099-Rs for my Roth IRA account:

Roth IRA 1099-Rs

1. Gross Distribution: $947.77

2a. Taxable amount: $0.00

2b. Taxable amount not determined: () 

Total distribution: ()

7. Distribution code(s): N  

N--Recharacterized IRA contribution made for 2022 and recharacterized in 2022.

IRA/SEP/Simple: ()

16. State distribution: $947.77

1. Gross Distribution: $6,684.76 

2a. Taxable amount: $0.00

2b. Taxable amount not determined: ()

Total distribution: ()

7. Distribution code(s): R

R--Recharacterized IRA contribution made for 2021 and recharacterized in 2022.

IRA/SEP/Simple: ()

16. State distribution: $6,684.76

In 2022, I received one 1099-R for my Traditional IRA: 

Traditional IRA 1099-R

1. Gross Distribution: $12,296.15

2a. Taxable amount: $12,296.15

2b. Taxable amount not determined: (X)

Total distribution: (X)

7. Distribution code(s): 2

2--Early distribution, exception applies (under age 591⁄2).

IRA/SEP/Simple: (X)

16. State distribution: $12,296.15

In 2022, I mailed in my 2021 8606 and submitted my 2022 8606 with my 2022 1040.

2021 8606

1. 6000

2. 0

3. 6000

14. 6000 

2022 8606

1. 6000

2. 6000

3. 12000

4. 0

5. 12000

6. 0 

7. 0 

8. 12296

9. 12296

10. 0.976

11. 12000

12. 0

13. 12000

14. 0 

15a. 0

15b. 0

15c. 0 

16. 12296

17. 12000

18. 296

@DanaB27 , tagging you for visibility as you've been very helpful on related backdoor questions. Thank you! 

[dmertz]

The IRS simply wants to see a Form 1040-X included with the submission of the 2021 Form 8606 when you have already filed your 2021 tax return.  The IRS also wants to see an explanation of the recharacterization included with your 2021 tax return, which TurboTax should have already included if you entered the original Roth IRA contribution into TurboTax and indicated that you changed it to a traditional IRA contribution.  It won't hurt to include the explanation of the recharacterization again on the Form 1040-X that you will be submitting with the 2021 Form 8606. 

Nothing will appear as changes to your originally filed 2021 tax return, so everything in Column B of Form 1040-X will be zero.  The only relevant information on the Form 1040-X will be the explanation statement to provide the information mentioned above.

[fanfare]

The proper way to file Form 8606 is attached to Form 1040-X.
Form 8606 can be mailed by itself only when you are otherwise not required to file a tax return.

Based on your letter, IRS insists.

Do you have the correct taxable amount on Line 4b and did not take a deduction?
After you e-File,
get Form 1040-X from IRS website and mail it in with your 8606, which you can also get in fillable PDF.
Note: since you are not changing any dollar amounts on your amended tax return, you can leave all the lines 1-23 EMPTY.
-

Part III explanation: "didn't include Form 8606 with e-File".

Done this way, you sign 1040-X, not 8606

@NigelSalad 

[NigelSalad]

Thank you @dmertz @fanfare for your responses! They were very helpful. 

Just to confirm, I only need to include the explanation of the recharacterizations/conversions for 2021 since that's what the 2021 8606 reflects, right? I do not need to include the whole story, which includes 2021 and 2022. 

Question from @fanfare: Do you have the correct taxable amount on Line 4b and did not take a deduction?

• I believe so: line 4b of my 2021 1040 is blank and I only took the standard deduction of $12,550. 

Based on both of your responses, I will send the following to the IRS to resolve the issue. Could you please confirm if you agree? 

1. 1040-X for 2021
   1. Leave lines 1-23 blank
   2. In Part III, include the explanation of why I'm submitting a 1040-X and the recharacterizations/conversions 
2. 2021 8606
   1. Same as the one I sent in before, but not signed this time (On Page 2 of Form 8606: "Sign here only if you are filing this form by itself and not with your tax return")
3. Explanation of the recharacterizations/conversions on a separate paper
   1. Depending on the answer to question above, the explanation will just cover the 2021 recharacterizations/conversions or both 2021 and 2022. 

Thank you again for your assistance clearing this up. With TurboTax, I imagine this will be a lot easier the next time around 🙂

[dmertz]

I generally agree except that given the IRS asked for the Form 1040-X I would probably complete lines 1 through 23 showing zeros in column B, explicitly rather than implicitly showing that there are no changes to the previously filed 2021 tax return.

[NigelSalad]

@dmertz @fanfare, thank you for all the help thus far! 

I submitted my 1040-X and 2021 8606 together a few months ago and everything was quiet.

On the 1040-X, I left 1-30 blank and included my explanation of the changes in Part III:

"I did not include my 2021 Form 8606 with a Form 1040-X. Since I am only changing information, I’ve left lines 1-23 blank.

Explanation of Recharacterizations & Conversion of 2021 Roth IRA Contributions: In 2021, I contributed directly to and maxed out my Roth IRA. In 2022, I realized that I exceeded the lower bound of the 2021 Roth IRA income limit range, so I recharacterized my 2021 Roth IRA contributions into a Traditional IRA. I then converted these funds from the Traditional IRA back to my Roth IRA. My 2021 Form 8606 shows that I have a basis to carry forward to 2022 due to my non-deductible Traditional IRA contributions. My 2022 Form 8606, which I included with my 2022 Form 1040, takes into account the $6,468.52 that was converted to the Roth IRA."

In my 2021 8606, I had the following:

1. 6000

2. 0

3. 6000

14. 6000

On 1/1/2024, however, I received a letter from the IRS stating:

"We made the changes you requested to your 2021 Form 1040 to adjust your pensions and annuities. As a result, you owe $2,035.84.

Increase in tax: $1,826.00

Increase in interest: $209.84

Amount due by January 22, 2024: $2,035.84"

I called the IRS and the agent informed me that the info in my 2021 8606 led the IRS to categorize something as income and that's why I'm receiving a tax bill. The agent said that I would need to send the IRS a letter explaining why I think the tax bill is incorrect. 

I do not know how my 2021 8606 would show income. In the explanation, I said I contributed to my Roth IRA in 2021 and recharacterized / converted those funds in 2022. I submitted the 2021 8606 to show that I have a basis of $6,000 to carry forward to 2022. 

Why would the IRS think I have additional income to pay taxes on? Did I do something incorrect? 

I would really appreciate any advice. Thank you and Happy New Year! 

[dmertz]

It seems like the IRS is making a lot of errors lately, perhaps due to the learning curve for new employees.  The  response you got from the IRS makes no sense.  Form 8606 is for IRAs and has nothing to do with pensions an annuities; you reported no change related to pensions and annuities.  Nothing about reporting a nondeductible traditional IRA contribution could increase income tax liability.

$1,826 is suspiciously exactly equal to 22% of $8,300.  If this amount of additional income would have fallen in the 22% tax bracket, that might shed light on something entirely unrelated to Form 8606.  Pension an annuity distributions are reported on 2021 Form 1040 line 5a/b. 

The recharacterization had nothing to do with a Roth conversion, so it would have been better if your explanation of the recharacterization made no mention of a Roth conversion or anything about your 2022 tax return.

[NigelSalad]

I appreciate the quick reply @dmertz. I called the IRS again to see if they could tell me what exactly was updated to result in the tax bill, but one of their systems was down and they couldn't see my 1040-X. They said to call back in a few weeks. 

It seems like the IRS is making a lot of errors lately, perhaps due to the learning curve for new employees.  The  response you got from the IRS makes no sense.  Form 8606 is for IRAs and has nothing to do with pensions an annuities; you reported no change related to pensions and annuities.  Nothing about reporting a nondeductible traditional IRA contribution could increase income tax liability.

Ok, that was my understanding, too. 

$1,826 is suspiciously exactly equal to 22% of $8,300.  If this amount of additional income would have fallen in the 22% tax bracket, that might shed light on something entirely unrelated to Form 8606.  Pension an annuity distributions are reported on 2021 Form 1040 line 5a/b. 

My 2021 Form 1040 lines 5a/b are both blank. Also, since all fields 1-23 in 2021 Form 1040-X were left blank, there were no updates to pensions & annuities in that form. 

The recharacterization had nothing to do with a Roth conversion, so it would have been better if your explanation of the recharacterization made no mention of a Roth conversion or anything about your 2022 tax return.

Got it. That might have led to the confusion. 

Would you suggest adding anything else to my response letter below? 

-------

SSN:

Tax Year: 2021

Form: 1040

To Whom It May Concern: 

On January 1, 2024, I received a letter from the IRS stating that "We made the changes you requested to your 2021 Form 1040 to adjust your pensions and annuities. As a result, you owe $2,035.84." I believe the tax bill is incorrect and have provided my reasoning below. 

In August 2023, I sent the IRS a 2021 Form 1040-X and 2021 Form 8606. The 2021 Form 1040-X had no updates other than an "Explanation of Changes" in Part III. The explanation said that I was fixing my mistake of not including my 2021 Form 8606 with a 2021 Form 1040-X. The explanation also described the recharacterization of my 2021 Roth IRA contributions.  

I believe the tax bill is incorrect because I have not made any adjustments to pensions or annuities. In my 2021 Form 1040-X, fields 1-23 were left blank. In my 2021 Form 8606, I reported that a nondeductible traditional IRA contribution was made and that no conversion was performed, thus giving me a basis for 2021. Since none of the following would result in increased tax liability, I believe the tax bill is incorrect. 

Please let me know if I can provide any additional information. 

Thank you,

-------

[dmertz]

That all sounds reasonable to me.  Of course it's the IRS that needs convincing.