How to fix Excess Roth IRA Contribution in 2020?

[pidgessn]

@dmertz ok. I just need to pay the 6% of 2020 IRA excess ($1500) in 2020 and 2021 Form 5329. There is no 6% or 10% penalty in 2022 Form 5329. It is just to show that the excess contribution has been zeroed out in 2022, right?

[dmertz]

Right.

[pidgessn]

@dmertz  @DanaB27  Can I file form 5329 for 2020 and 2021 by itself? Line 24 in Form 5329 says 'Include this amount on Schedule 2 (Form 1040), line 8'. Does it mean I should also file Schedule 2 for 2020 and 2021?

What should I fill in Form 8606 Part III in my case?

[dmertz]

Form 5329 can be filed stand-alone because it has a signature block, but it you prefer you could file it along with Schedule 2 and Form 1040-X.  It won't hurt to do so.

TurboTax automatically prepares Form 8606 Part III and includes it with your tax return when you enter a code-J Form 1099-R.  Be sure to click the Continue button on the page that lists the Forms 1099-R that you have entered and enter and confirm you basis in Roth IRA contributions (including the excess contribution).

[pidgessn]

@dmertz @DanaB27 

1. I have a $1800 tax refund credit balance on my account for 2020. Will the IRS deduct the 2020 Form 5329 6% additional tax from this credit balance or should I make a separate payment to IRS?

2. I have received the full tax refund for 2021 and there is no credit balance for 2021. Should I make a separate payment for 2021 Form 5329 6% additional tax or will IRS use the 2020 credit balance to deduct this amount as well?

[ThomasM125]

If you are owed money from 2020,  any taxes due after that will be applied to that balance, assuming that return is processed before you file the other returns. Since you haven't received the refund from 2020, it may be that it hasn't been processed for some reason or maybe the refund is lost in the system somehow. In that case, you would need to pay the tax due on the returns you are going to file. It may be best to file the returns and see if the balane due is applied to 2020, otherwise you will get a notice of tax due and you can pay it then. @pidgessn 

[pidgessn]

@dmertz @ThomasM125 I filed the tax return for 2020 and got a notice from IRS that 'We have reduced your penalty for failing to pay estimated taxes Refund: $1836'. If you haven't already received a refund $1836, you should receive it within 4-6 weeks, as long as you don't owe other taxes or debts we're required to collect. 

I filed the tax return for 2021 and received my tax return. I didn't get any other notice from IRS. I went and checked my IRS account transcripts as well. I could see that my 2020 return was processed but my tax return was not refunded to me. It is showing credit balance of $1836 for 2020. The only reason I could think of on why I didn't get the refund because I contributed excess Roth IRA in 2020 and didn't file Form 5329 with my return. Is there anyway to check that with IRS?

When I file form 5329 for 2021, will they apply the deduction on my 2020 credit balance or should i make a separate payment?

[pidgessn]

@dmertz any thoughts?

[dmertz]

You would have to ask the IRS about the status of the credit on your tax account.

[pidgessn]

@dmertz I contacted the IRS. They said it's a system issue and they will refund my 2020 tax return credit balance ($1836) to me in 48 hours. They asked for my mobile number. The associate in the phone didn't know anything about my 2020 excess Roth IRA contribution. They are saying that there is no action needed from my end and there is no balance that I owe to IRS. I thought I didn't get my 2020 refund credit because I made Excess Roth IRA contribution in 2020. Thats why I asked Schwab to remove the excess from 2020 contribution. I'm super confused. What would you recommend? Should I file forms 5239 for 2020, 2021, 2022?

I didn't get any explicit notice saying I contributed excess to my Roth IRA account. I couldn't find anything on my tax transcripts as well.

I filed my 2021 tax return and got my 2021 tax return credit without any issues. I'm yet to file my 2022 tax return. 

[dmertz]

Excess Roth IRA contributions are required to be self-reported.  The IRS does not detect an excess Roth IRA contribution themselves without doing an audit because they do not automatically cross-reference Forms 5498  reporting Roth IRA contributions with your filed tax returns.  The problem is if they ever do detect the excess Roth IRA contribution, you'll owe retroactive penalties for all of the years that the excess was in your Roth IRAs.