Thought IRA, actually a brokerage account

[bw_]

in 2014, 2015, I deducted between $1,000 - $1,150 each year as Contributions to my IRA in my tax filings (big whoop, saved me like $150 on my taxes), I just pulled the money (to buy a house) out of my E*TRADE account that was transferred from Capital One named "IRA - Invest" (This must have been my name for it, I honestly don't know, but it certainly contributed to the error if it was on me). 

E*TRADE said that it was a brokerage account, and NOT an IRA, and gave me a 1099-B.

It was my understanding that I opened an IRA at Capital One,  but E*TRADE swears it was opened as an "individual account" AKA a brokerage account in 2014 (who names these things?!). 

Has anyone experienced anything like this?

Since I drained the account (< 10,000), I get a fresh start moving on from here, but I'm not sure where that leaves me and the IRS.   My current plan was to submit it as a substitute 1099-R and not look back, it makes me a little queasy though now that I know that E*TRADE believes it to be a brokerage account and gave me a 1099-B, even though I still hold that this must be an E*TRADE error or possibly a Capital One error in transferring the assets to E*TRADE. (I'm in CA, not that it likely matters)

[VolvoGirl]

Did you ever get any 5498 forms from them showing the "contribution" amounts you sent?  Did you keep all the old statements?    When you sent the money in what happened with it?  Did it buy shares?  

[bw_]

I did not receive any 5498 forms showing contribution amounts. And I do not have any of my old statements that I could find.  When I sent the money in it was used to buy shares. 

[DaveF1006]

It depends. It sounds like you have been contributing to an investment account, and not an IRA. At some point, your IRA account became an investment account, perhaps with or without your knowledge. Usually these things are not done without your knowledge, thus I would suggest your contact ETRADE to find out how this change in accounts happened.

Maybe you opened an investment account with the bank thinking it was an IRA. Anyhow, do not create a substitute 1099R because the income has probably already been reported on a 1099B issued by ETRADE.

[ Edited 02/14/22|03:47 PM PST]

[Opus 17 · Accepted solution]

If the account was never an IRA, then all those deductions were improper.  (And I'm surprised the IRS has not notified you before.)

I think it is impossible, if not illegal, for you to have opened an IRA which was then "converted" to a brokerage account.  That would have involved withdrawing all the IRA funds, getting a 1099-R, and paying income tax plus a 10% penalty for early withdrawal. 

However, if you had a regular broker account, you should have been getting tax forms every year, depending on how you were invested.  A 1099-B form if you sold shares, a 1099-DIV for dividends, and a 1099-INT for any bank interest that was paid if your investments were held in cash.  It would be almost impossible to invest in something that had no sales, no interest and no dividends, unless you specifically invested in growth stocks that pay no dividends.  (As an example, I invest in mutual funds and ETFs and there are always some capital gains and dividends that are reported due to trading activity within the fund, even if I don't sell my specific shares.)

So I would start by gathering information.  Ask e-trade and capital one if they have any 1099-B, 1099-INT and 1099-DIV, for your account, going back to 2014.  Get your IRS wage and income transcripts and see if there are any 1099s on file for you that are linked to these accounts.  https://www.irs.gov/individuals/get-transcript

You may need to request your transcripts by mail since the online access does not go back 7 years. 

Then, you need to file amended tax returns for all prior years you claimed a deduction for IRA contributions.  Remove the deduction and add the 1099-B, etc., if you got them and didn't already include them.  You can't file an amended return to get a refund, but you can and should file to pay back taxes you owe due to your own mistakes.  Turbotax only supports the last 3 years so to file amended returns before 2018, you will need to see a tax professional or download the forms and instructions and do it by hand.  (It's not too complicated if removing the deduction is the only change you need to make.)  After sending in the tax returns and payment, the IRS may hit you with a bill for late fees and interest, you can apply for a waiver of the late fees for cause, or as a first-timer if you never owed a penalty before.  

Now, the statute of limitations for the IRS to audit you is 3 years, or 6 years if your tax is understated by more than 25%.  That means that the IRS probably can't audit you, or bill you, for this mistake on any tax return before 2018, and the audit window for the 2018 window will close April 18, 2022, assuming you filed on time. So you could potentially sit tight and keep quiet for now, and not call attention to the problem.  Wait until after April 18, 2022, and then only file amended returns for 2019, 2020 and 2021, to remove the IRA deduction.  Since the IRS didn't catch you in time, they can't do anything about it now.  However, I am not an attorney, so you should consider these comments as suggestions only, and possibly review the situation with your own tax accountant.

Since you got a 1099-B, I would not prepare a substitute 1099-R for the entire withdrawal unless you can find your actual contract from 2014 that says the account was an IRA.  The conflict between those two forms will definitely get the attention of the IRS.  You can assign any name you like to the broker account (it's just a nickname in case you have more than one account), so that by itself doesn't prove anything.  

[Note added after]

In my above answer, I assumed you made and deducted "IRA contributions" that weren't, in every year since 2014.  From your question, you might only have made contributions in 2014 and 2015.  In that case, those are the only 2 years that need to be amended.  Or, since they are past the statute of limitations, forget it because it's too late for the IRS to come after you.  

[Opus 17]

And here's another fun fact.

Let's assume you did open an IRA at Capital One, and when it was transferred to e-trade, they made a mistake and put it into a regular broker account.  That mistake is your fault (IRA means individual retirement account) and all the consequences and penalties are on you.  It was your responsibility to detect the mistake and fix it (you had 60 days), even if the mistake was made by them.

You would have owed income tax plus a 10% penalty for early withdrawal in the tax year that the IRA funds were withdrawn from Capital One and put into a plan broker account instead of a new IRA at e-trade.  That's also something you would correct on an amended return, or take a chance and ignore if it was past the statute of limitations. 

[bw_]

These are both excellent, 

Opus, thanks for the long-format answer it’s appreciated, since I happened to invest it in a single tech stock, that performed very well. All those 1099-* forms never existed luckily because there were no dividends, no sales. Quite a stroke of luck.

it seems I have past the time period where I can correct my mistakes, and luckily I only contributed to that IRA twice and never got any other forms for it, except for perhaps one in 2018(need to go check that out). 

the information both of you gave is consistent with the advice I received from a friend who is a tax professional today. Thanks and I will be more careful with my investments in the future. 

[Hal_Al]

It sounds like you bought shares back then, but this is the first time you've sold any shares.

The good news is that you will only be taxed at the capital gains rate (which may be 0%) and only on the gain not the entire amount.  Had it been an IRA, the entire amount woulda been taxable at ordinary income rates plus 10% penalty if you are under 59.5.

This may be a good mistake.

As Opus 17 said, technically you should file amended returns for those years you improperly claimed a deduction. But, because of the time limit, probably don't have to

[bw_]

Agreed, it is a good mistake I think. If not a stressful one at first.  (Also you skip the 10% penalty if you are using it to buy a home **)

** there are a lot of IF’s on that one, I’m sure you’re aware but for future readers. 

[VolvoGirl]

But won't it come back and bite you when you turn 72 and the IRS will expect you to start taking the RMD?  

[Opus 17]

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@VolvoGirl wrote:

But won't it come back and bite you when you turn 72 and the IRS will expect you to start taking the RMD?  

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If the IRS has failed so far to dun the taxpayer for taking deductions not supported by form 5498s from the "IRA", does the IRS even know they are supposed to have an IRA?

On a $150 tax deduction from 2014, the interest and penalties due should be another $150 at this point.  So it would not cost too much in dollars to file the amended returns (the cost will be more in the hassle than the wallet).  It's never a bad idea to get things squared up, but the statute of limitations may make it unnecessary.   Professional advice is always recommended.  

@bw_ 

"it seems I have past the time period where I can correct my mistakes"

Not really.  You can always file an amended return to correct a mistake.  It's not as easy if it is more than 3 years old, and you won't get paid a refund if the amended return is more than 3 years late, even if one is due, but getting the correct facts on the table is always allowed, even if it is not required due to the passage of time.