Tax Year Prior to 2020: Disallowed IRA Contributions

[JEvoy]

Last year the IRS audited me and disallowed my 2016 IRA contributions. They amended my 2016 return and I paid all taxes on that income for that year. Since it wasn't supposed to be in there, I took the amount out of my IRA as part of the audit in 2019. I now have a distribution for 2019. How do I deduct that form my income 2019 so I don't pay tax on it again?

[dmertz]

What was the reason that your 2016 contribution was disallowed?

Was your contribution for 2016 in excess of $5,500 (plus an additional $1,000 if age 50 or over in 2016)?

[JEvoy]

I was covered under my employer's 401(k) program, so should have put the money in there. You cannot put money into a traditional IRA when you have a 401(k).

[VictorW9]

If you have a 1099-R, the code in box 7 tells if taxes are to be taken out for 2019 and if subject to early withdrawal penalty. By what you said, it seems like you made excess contributions to your IRA account, hence the reason you were told to make the withdrawal and not close the account completely.

[dmertz]

Contributing to the employer's 401(k) in and of itself does not make the traditional IRA contribution an excess contribution, it only makes it a nondeductible contribution if your AGI is too high.  Only if you were age 70½ or older or you had too little compensation left to support the traditional IRA contribution after contributing to the 401(k) (or you contributed more than the annual limit for IRA contributions) would it have been an excess contribution that would have required removal.

Please verify whether or not the contribution was an actual excess contribution for some reason that you have not yet identified or if this was simply a nondeductible contribution.  The reason you gave for this having been an excess contribution is not a valid reason by itself.

Assuming that the contribution for 2016 was simply a nondeductible contribution, not an excess contribution, apparently the IRS only disallowed the deduction for the contribution, not the contribution itself.  Assuming that this is the case, you need to have filed a 2016 Form 8606 to report the nondeductible contribution.  In 2019 TurboTax you would then tell TurboTax that you made and tracked nondeductible traditional IRA contributions, enter the amount from line 14 of the 2016 Form 8606, enter your 2019 year-end balance in traditional IRAs, then TurboTax would calculate on your 2019 Form 8606 the taxable amount of your distribution and how much of the amount from line 14 of the 2016 Form 8606 remains in your traditional IRAs to be applied to future distributions, making a portion of each of them nontaxable.

[JEvoy]

Here's what happened - the IRS audited my 2016 return last year and made me pay the taxes on the unqualified contributions, so taxes have already been paid on the $6500. I took the money out of my IRA in 2019 and have a 1099-R classifying it as a normal distribution. I've already paid the taxes on it - how do I show that on this year's return?

[dmertz]

Neither the IRS nor the tax code uses the term "unqualified contributions" with respect to IRAs.  I'm trying to determine if your contribution was an excess contribution or not (because you did not have earnings to support the contribution or you were over age 70½), or if it was not an excess contribution but was simply not a deductible contribution.  Your original question and subsequent responses are somewhat contradictory in this respect.  Your mention of being covered by a 401(k) plan suggests that the contribution made for 2016 was simply a nondeductible contribution, not an excess contribution, and there was no requirement to take the money out of the IRA.

Did you use TurboTax to prepare your 2016 tax return?

As part of your dealings with the IRS, did you file a 2016 Form 8606?

Did the IRS tell you that you must take the money out of the IRA?

Did you have a nonzero balance in any traditional IRAs at the end of 2019?  (A 401(k) is not an IRA so don't include that.)