Written by: Jonathan Crosby, EA
In August, I was assigned a case that was different from any other case I have ever worked. It was challenging in the way a serious jigsaw puzzling is challenging, and it required the same type of patience and commitment.
The IRS had sent out a soft notice in July asking our member for clarification of $626,842 in retirement distributions from 2012 that they couldn’t account for. After a review of the return I could understand their confusion. It turned out that the taxpayer’s son had been moving his mother’s retirement funds around in an effort to maximize the returns. The records showed $6,880,800 in distributions. The majority of the funds were re-characterized, and only $609,047 had been reported as income.
On further investigation and questioning, I learned that when the son prepared his mother’s return he had consolidated some of the thirty-seven transactions because the software program could only handle up to thirty transactions. The other issue that added to the challenge was that four of the re-characterized transactions had taken place in 2013 − within the required one year time frame − however, the IRS wasn’t able to connect the dots just by looking at the taxpayer’s 2012 return.
My first course of action was to understand, recreate, and validate what the son had done while preparing the return. I pulled the taxpayer’s transcript, which included seventy-two pages of transactions and multitudes of Form 1099-R Forms representing the distributions. The codes in box seven of the form were varied as well, from the common to the rarely seen:
- Code 2 − Early Distribution Exception Applies
- Code 7 − Normal Distribution
- Code N − Re-characterizations IRA Contribution made for TY2012 and Re-characterized TY2012
- Code T − Roth Distribution, Exception Applies
- Code R − Re-characterizations IRA Contribution made for TY2012 and Re-characterized TY2013
- Code Q − Qualified Roth IRA Distribution
After sorting through the various transactions I was able to paint a picture of what had transpired and connect the dots. But I still needed to recreate exactly what the taxpayer’s son had done in Turbo Tax.
Meanwhile, the taxpayer received a second notice showing an amount due of $74,931, which included penalties and interest. I knew the taxpayer didn’t owe this, I just needed to be able to explain what had happened in a manner that whoever reviewed the document s could understand.
Almost three months after my letter went out to the IRS, we received a response stating that the taxpayer owed the same amount listed on the original notice. Based on the reviewer’s notes, it was apparent that he or she didn’t understand what was in the response package. Not to be deterred, I got on the phone with an IRS Representative and went through the material I had sent, page by page. When we were finished he understood the situation and agreed to make the changes I requested.
The taxpayer received a “no change” notice in January, which means she owes the IRS nothing. Needless to say, both the taxpayer and her son are extremely relieved by the outcome and grateful for our service. And I am looking forward to my next puzzle.
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