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Deb19

Help With Roths & A Tax Problems

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I currently contribute to my school's 457, and my husband and I also contribute to our Roths. Through casual reading last night I learned that you cannot file separately and do a Roth IRA. When our tax advisor suddenly passed away, his daughter in law took over. She was the one that had us move to filing separately so we would get a larger refund from 2012- 2014. In 2015, all she said was she could no longer file us separately. I did not ask why. (She should have filed a 5329 form so we could have corrected this problem, she did not.) Now I am sick from this huge and costly tax problem we now have to deal with. We will owe 6% penalties for every year this continued..... plus all Roth money (30,000) will need to be pulled with the 10% early withdrawal also to be paid. Has anyone gone through anything like this? Also, what should we do with this 30,000. Right now I want to bury it in my backyard and never invest again. I am devastated as I was trying to save money, but ultimately have ended up costing us. Any advice or suggestion to deal with this would be so appreciated.

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Deb19

 

 

 

Hey, I just got an IRS notice that I owe $2, 500 and I can't open my tax form from 2015 which is stored on my computer. I didn't save a paper copy for some dumb reason in that year .When it rains it pours!!

 

See if this helps. I would find an experienced tax professional.

 

https://ttlc.intuit.com/questions/3899496-married-filing-separately-and-wife-contributed-to-roth-ira

 

 

 

Please don't bury whats left in the backyard. We all make mistakes. Live and learn. Move on.

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OMG, What is going on with the IRS specifically to tax year 2015?

I just got a notice from the IRS and owe almost $10,000 for 2015 too! Luckily (I have my fingers crossed), I used Turbo tax, I connected with their tax specialists and they are looking into my problem.

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I currently contribute to my school's 457, and my husband and I also contribute to our Roths. Through casual reading last night I learned that you cannot file separately and do a Roth IRA. When our tax advisor suddenly passed away, his daughter in law took over. She was the one that had us move to filing separately so we would get a larger refund from 2012- 2014. In 2015, all she said was she could no longer file us separately. I did not ask why. (She should have filed a 5329 form so we could have corrected this problem, she did not.) Now I am sick from this huge and costly tax problem we now have to deal with. We will owe 6% penalties for every year this continued..... plus all Roth money (30,000) will need to be pulled with the 10% early withdrawal also to be paid. Has anyone gone through anything like this? Also, what should we do with this 30,000. Right now I want to bury it in my backyard and never invest again. I am devastated as I was trying to save money, but ultimately have ended up costing us. Any advice or suggestion to deal with this would be so appreciated.

 

 

Deb,

 

Who told you that you had to pull ALL of your Roth money out? Did you get a notice from the IRS?

You are right, this is terrible!

 

But don't do anything until you get a notice from the IRS, then consult with a tax specialist.

So sorry, but don't be so angry that you will never invest again.

 

Steve

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For some reason that particular year 2015 I used a turbotax CD instead of the online format which automatically saves it online. It was good deal at COSTCO. So the disc I have doesn't work in opening the return now. I am not sure I can get turbotax to help me since i have no return!! I already asked IRS to send me transcripts of my return so I can investigate. I will use online Turbotax for now on.

 

Funny, I can't remember ever having a problem using turbotax before.

 

Tony

 

 

P.S. California and Virginia are BLUE states. Hmmm

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Tony,

Ugh. I am sorry to hear that. I am sure the IRS would be able to send you a copy?!

 

 

Steve,

I stayed up all last night reading and learning. Today, I was talking to a new tax accountant. I am up to 10,000 in what I wil owe.The problem with waiting is that the longer I let this go, we will have to pay 6% each year. Could you imagine if my letter wouldn't come for another 5 years! There is no statue of limitations. I am just sick. I trusted this tax professional and am innocent.....which I know means nothing to the IRS. The CPA told me I will have to pull the money out from 2012 on until now. Not only is it painful now but this will be less money I have now in the market working for me. It is amazing how quickly life can change. I am about to send my oldest off to college so this is horrible timing... though I realize no time is easy. Thanks to both of you for responding.

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Deb

 

Looks like you have no recourse but to pay up. I wonder if you can claim all the penalty and fees as a loss on future returns*. I would ask your new tax advisor. Try and look on the bright side of things. This is a lesson learned just like all of us who had to pay surrender fees in the past to get out of bad 403b plans.Looking back, it helped make me a smarter investor. My father in law also had his tax "expert" make a major mistake on his taxes that ended up costing him so its more common than you might think. Thats why we preach educating ourselves as much as possible here.

 

My letter says I failed to report my taxable dividends and they were blank on my form . Thats ridiculous. I know better. I did send them electronically. Could my entries just have disappeared ? I don't use a tax expert. I use turbo tax. I am sure turbotax would have alerted you to the fact that you can't file a Roth Ira when married filing separately.

 

Tony

 

 

*I doubt you can deduct the penalties

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Deb,

Post your problem on Bogleheads and/or get another opinion (or do a search on Bogleheads to see if somebody else had this problem). I cannot believe this because if you made this mistake many others probably have too. The IRS just wants its taxes. But you said that you would have to pull all the money out and pay a 10% penalty too. That's where you need to find out what is it that the IRS wants, and nothing more.

 

Also, as a last resort, I know we teachers are not litigious types, but you have been harmed big time and you have an excellent case against your tax person. CPAs have fiduciary standards and all have liability coverage for things like this. She did not do this for one year, but three years! You have a big case. However, first see if you can negotiate a settlement with your tax person with no legal involvement.

 

At least try. Both you and your husband talk to her in person and be clear that this is a BIG DEAL! She is as responsible as you are. You hired her to look out for your best interests, and she failed.

 

I am so sorry for this,

Steve

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She did not do this for one year, but three years! You have a big case. However, first see if you can negotiate a settlement with your tax person with no legal involvement.

 

 

 

Steve

 

If her tax advisor is a CPA or a tax attorney she may have some recourse because they I believe are governed by standards of professional responsibility and IRS ethics but I don't know who she would contact. Some state agency?The IRS? But many tax preparers which dominant the industry are not governed by any standards.Also, I would be interested in knowing if she signed your tax return during these three years as the preparer or if she made Deb 17 and Her husband be the only signers. I would definitely post this on Bogleheads but I get the feeling if you signed your tax returns during those three years you may be stuck.Regardless who did your return , its still your return. If you want to take legal action you will have to consider the cost of doing so. I would definitely see if you could get her to settle for some of the money lost. She should have known better after 3 straight years. I do not understand why you need to pull the whole amount if the other money was invested when you filled jointly before those three years.

 

 

Here is an article that might be of interest.

 

https://taxpayeradvocate.irs.gov/userfiles/file/2013fullreport/regulation-of-return-preparers-taxpayers-and-tax-administration-remain-vulnerable-to-incompetent-and-unscrupulous-return-preparers.pdf

 

 

Please let us know what you plan on doing and what happens. This could happen to any of us.

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you cannot file separately and do a Roth IRA

 

I don't know about past years but that isn't strictly true for 2017:

  • If you lived with your spouse then you can contribute a reduced amount if your modified adjusted gross income is less than 10k.
  • If you did not live with your spouse then you can contribute under the same rules as a single or head of household filer.

https://www.irs.gov/retirement-plans/amount-of-roth-ira-contributions-that-you-can-make-for-2017

 

We will owe 6% penalties for every year this continued..... plus all Roth money (30,000) will need to be pulled with the 10% early withdrawal also to be paid...what should we do with this 30,000

 

It sucks, no way around that. However, the stock market has outpaced the 6% penalty so know that you're paying this fee with profits. That takes some of the sting out of it.

 

As I understand the tax code, you can withdraw contributions at any time without paying a penalty. There are ways to withdraw the earnings once you've been invested for 5 years.

  • If the IRS isn't requiring you to take action immediately you may want to do the math to see if delaying until the 5 year window and bypassing the early withdrawal fee is in your best interest.
  • If the IRS is requiring you to close out your Roth entirely and you're already maxing every tax advantaged account then I suppose you'll have to put the post-fee money in a taxable account.
  • If the IRS is requiring you to close out your Roth entirely but you're not maxing every tax advantaged account then increase your tax advantaged contributions for a time and use the post-fee money for living expenses...effectively moving the post-fee money into a tax advantaged account.
  • If the IRS is not requiring you to close out your Roth entirely (I imagine they are) then you can pay the fee with excess money you have or cash out a portion of the Roth contributions to pay the fee and then leave the Roth alone. This would let you avoid the early withdrawal fee.

...these are the avenues of thought I'd begin exploring. I'm not a tax expert though.

 

Right now I want to bury it in my backyard and never invest again. I am devastated as I was trying to save money, but ultimately have ended up costing us. Any advice or suggestion to deal with this would be so appreciated.

 

You're talking to a group of people who've all been cheated and lost money one way or another. It happens to the best of us.

 

Part of my life philosophy is to minimize suffering, which means letting go of everything I cannot control and accepting everything that is or will eventually be. I do my best and fail regularly. In your case, you cannot control the past; it is over and set in stone. Beating yourself up or dwelling on it only serves to increase your suffering. It's a sunk cost; write it off and leave it behind. The only thing you can control is finding an optimal way out, so do that chore and move on with your life.

 

My rough estimation indicates that this loss will not significantly impact your retirement. You didn't deserve this and there may be a good chunk of emotion now, but in the big picture you're in virtually the same place you were before this happened.

 

Ask the bogleheads for help/perspective and take this opportunity to make sure you're living frugally and investing entirely in low cost, well diversified, total market index funds. If you're not doing that then you may be inflicting far more pain than this tax issue has done.

 

I do my taxes by hand and I suggest everybody give it a go. Perhaps a more practical suggestion is to use TurboTax, people I know seem to love it.

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Guys....thanks all so much.

Steve - I will post this on bogleheads. Thank you for the suggestion. I will try to negotiate with her. She was not in on Friday so I sent an email to her.

 

August 3rd, 2017

Dear Gina,

 

My husband and I have been tax clients of yours, and before you, your father-in-law's for many years. While many of my contemporaries have begun doing their own taxes using one of the relatively cheap tax programs, I have continued to patronize you, primarily to avoid complications that may arise due to my lack of knowledge of tax law, and because tax law changes from year to year. In other words, I have been a loyal customer to your firm, because I wanted my taxes to be done correctly, professionally, as well as feel confident in my return.

 

Last night, I was reading an article about common Roth IRA mistakes, and I stumbled across something that I believe is going to be a significant problem for us. The article, which my subsequent research verifies, states clearly that married individuals cannot make a Roth contribution for years in which they file separately, which we did with your firm's knowledge/consent for tax years 2012, 2013, and 2014. Indeed, it was your suggestion that we file separately.

 

It appears, again I am no expert, that as a result of this "excess contribution" we owe a 6% penalty for each year the contribution was not withdrawn. Looking at the forms and drafting them as it appears they should be completed will result in a tax penalty to each of us, of 3,600 for a total of $7,200.00. This does not include the penalty we will have to pay for the early withdrawal, and the tax on the subsequent gain.

 

This is precisely the type of issue I looked to avoid by engaging your firm. The only mention you ever made to me was that beginning in 2015 we could no longer file separately. There was no discussion of a 5329 form, or amending any returns, etc., which would have substantially reduced or eliminated entirely the penalty.

 

I hope that I am in error in my assessment, and that you will be able to ease my obvious concern in the face of a $10,000 potential and completely unexpected tax liability.

 

Honestly, I have been an emotional wreck since learning of this knowledge. It is difficult for me to focus on anything else. Please respond and assure me you will help straighten this matter out in a fair manner. Because of the great concern this is causing me if I don't hear from you on Monday, I will have to go somewhere else, because I need to have answers.

 

This is the letter I sent. Do you think this was the right course of action?? I am giving her a chance and yet getting across my point that I am concerned and not going to mess around. Was it too harsh?

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I also just located a questionnaire that she always makes us fill out and in it it shows I checked YES in the box for 'did you make Roth contributions'. I hope that can be used in my favor.

 

I will keep you all informed, and I hope others can learn from this.

 

Tony - Thanks for your info. and article. I believe she is a CPA. I want to learn more about an organization like you mentioned.

 

Edlab - Thanks so much for your words. I needed to hear this. My family and I sacrificed much to make these contributions. It is so infuriating and unjust, and somehow I am going to find a way to bounce back. I don't know tax code. I loved your bullet points and I am hoping my new CPA will know this?! I am especially thankful for your words because my next panic came from the idea that this will derail our retirement. Earlier this summer, our financial guy commended us and said we were on track however this was with that 30,000 . and continued contributions. I feared that all went up in smoke now. Your words were reassuring.

 

Thanks all again.

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Guys....thanks all so much.

Steve - I will post this on bogleheads. Thank you for the suggestion. I will try to negotiate with her. She was not in on Friday so I sent an email to her.

 

August 3rd, 2017

Dear Gina,

 

My husband and I have been tax clients of yours, and before you, your father-in-law's for many years. While many of my contemporaries have begun doing their own taxes using one of the relatively cheap tax programs, I have continued to patronize you, primarily to avoid complications that may arise due to my lack of knowledge of tax law, and because tax law changes from year to year. In other words, I have been a loyal customer to your firm, because I wanted my taxes to be done correctly, professionally, as well as feel confident in my return.

 

Last night, I was reading an article about common Roth IRA mistakes, and I stumbled across something that I believe is going to be a significant problem for us. The article, which my subsequent research verifies, states clearly that married individuals cannot make a Roth contribution for years in which they file separately, which we did with your firm's knowledge/consent for tax years 2012, 2013, and 2014. Indeed, it was your suggestion that we file separately.

 

It appears, again I am no expert, that as a result of this "excess contribution" we owe a 6% penalty for each year the contribution was not withdrawn. Looking at the forms and drafting them as it appears they should be completed will result in a tax penalty to each of us, of 3,600 for a total of $7,200.00. This does not include the penalty we will have to pay for the early withdrawal, and the tax on the subsequent gain.

 

This is precisely the type of issue I looked to avoid by engaging your firm. The only mention you ever made to me was that beginning in 2015 we could no longer file separately. There was no discussion of a 5329 form, or amending any returns, etc., which would have substantially reduced or eliminated entirely the penalty.

 

I hope that I am in error in my assessment, and that you will be able to ease my obvious concern in the face of a $10,000 potential and completely unexpected tax liability.

 

Honestly, I have been an emotional wreck since learning of this knowledge. It is difficult for me to focus on anything else. Please respond and assure me you will help straighten this matter out in a fair manner. Because of the great concern this is causing me if I don't hear from you on Monday, I will have to go somewhere else, because I need to have answers.

 

This is the letter I sent. Do you think this was the right course of action?? I am giving her a chance and yet getting across my point that I am concerned and not going to mess around. Was it too harsh?

 

I would not communicate with her yet. Wait until you calm down a little and continue talking with us and Bogleheads.

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Deb

 

Of course, we don't know your total income circumstances(its none of our business -really) but I would strongly suggest you try and learn to do your own taxes unless your family finance situation is unusually complex and involved. Years ago when I was younger my father- in -law who is a consummate believer in experts suggested that we allow his CPA to do our taxes. Those that have follow me at all know that my father-in -law was the same person who introduced me to American Express Financial Advisors. If you have followed me at all here at 403bwise you know how that turned out. The same thing happened with his CPA. We brought our taxes to his CPA and he charged me a bundle to do our taxes that were not all that complex. He also made some errors that left me with a balance due . Luckily, The IRS actually caught the mistakes and actually send me a refund!! beyond the balance due!!.. I refused to pay him the full amount he requested for his services. He accepted the cut but was surprised I refused to pay him the full amount he requested despite his mistakes.

 

Since then I have adopted Turbotax and have many many years of error free returns for minimal cost. In your particular situation, I can tell you the program would have caught the glaring Roth error you must now endure. Even after you buy Turbotax, it updates to new laws and taxes changes almost daily. No human could possibly know more than a good upper level Turbotax program. Even if you prefer going through a tax professional, I would at very least do the Turbotax program on your own on the side to see how things match up. This could catch any possible discrepancies and at the same time teach you about whats what in the tax world.

 

This recommendation is not much different than what we recommend here when it comes to investments. The experts don't always do whats best for us. Only by grabbing the bull by the horns on our own do we learn how to do whats truly best for ourselves. I have been done wrong by experts intentionally and unintentionally and I have grown to not trust them all that much.

 

Tony

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I would not communicate with her yet. Wait until you calm down a little and continue talking with us and Bogleheads.

 

I agree with Steve. You should have seen me yesterday when my letter came. I feel more rational about things now as I calm down and realize this may be a correctable situation. I have to say though 3 of us got the awful IRS letter in the same time period. Thats interesting to say the least.

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