Help! Will the IRS get me?

[billyjoe]

Mr.Market Members,
I don't want to burden you with my troubles during this Christmas, but I couldn't sleep last night worrying about this.
Each year I send in my IRA contribution prior to April 15th for the previous year. All was going well until I received a phone call around May 1st, 2004 stating that I'd already contributed for 2003 so did I want to change my current contribution to 2004. Here's what happened. Apparently my contribution for year 2002 which I'm sure arrived on time sat uncashed for about 10 days. By then it was too late to count it towards 2002 so it was listed as a 2003 contribution. I never saw any paperwork mentioning that fact. When the next year's check was received, they phoned saying I'd already contributed. This made my income tax returns in error since I never technically contributed for 2002.By that time my 2003 returns were also innacurate and maybe 2004 as well. It's getting more confusing all the time. My accountant asked if the Feds had called. I've never been notified by the IRS, but am worried the hammer will come down at which time they'll sock me for thousands in penalties. Remember what happened to Willy Nelson? A million dollar dispute became an 18 million dollar penalty. What do I do? Will the IRS eventually get me? Thanks and Merry Christmas to all.

billyjoe

[skiracer]

Mr.Market Members,
I don't want to burden you with my troubles during this Christmas, but I couldn't sleep last night worrying about this.
Each year I send in my IRA contribution prior to April 15th for the previous year. All was going well until I received a phone call around May 1st, 2004 stating that I'd already contributed for 2003 so did I want to change my current contribution to 2004. Here's what happened. Apparently my contribution for year 2002 which I'm sure arrived on time sat uncashed for about 10 days. By then it was too late to count it towards 2002 so it was listed as a 2003 contribution. I never saw any paperwork mentioning that fact. When the next year's check was received, they phoned saying I'd already contributed. This made my income tax returns in error since I never technically contributed for 2002.By that time my 2003 returns were also innacurate and maybe 2004 as well. It's getting more confusing all the time. My accountant asked if the Feds had called. I've never been notified by the IRS, but am worried the hammer will come down at which time they'll sock me for thousands in penalties. Remember what happened to Willy Nelson? A million dollar dispute became an 18 million dollar penalty. What do I do? Will the IRS eventually get me? Thanks and Merry Christmas to all.

billyjoe

Billyjoe,
If you let this situation go without taking some kind of action on your part to notify the IRS that you think there may be a problem as you have explained it you're leaving yourself open to whatever penalties an interest charges they deem fit and then you really have a problem.
I would get together with your accountant pronto and get all your previous records in order from those years 1040 filings an once you have all the info an ammunition on your part ready then have your accountant contact them about the situation in a notarized and certified letter stating your position with all the facts. Do whatever communication you have with them through your accountant because they look at them in a different light than the regular Joe. I wouldn't wait on this and would take action asap in notifying them that THEY made a MISTAKE with YOUR monies. I've had alot of dealings with them over late filings, I never file until the last Oct. 15 deadline each year and have gotten to know they routines pretty good. They will be fair an equitable if you take the initative and control the process to the best of your ability. Good luck.

[jiesen]

Billyjoe,
If you let this situation go without taking some kind of action on your part to notify the IRS that you think there may be a problem as you have explained it you're leaving yourself open to whatever penalties an interest charges they deem fit and then you really have a problem.
I would get together with your accountant pronto and get all your previous records in order from those years 1040 filings an once you have all the info an ammunition on your part ready then have your accountant contact them about the situation in a notarized and certified letter stating your position with all the facts. Do whatever communication you have with them through your accountant because they look at them in a different light than the regular Joe. I wouldn't wait on this and would take action asap in notifying them that THEY made a MISTAKE with YOUR monies. I've had alot of dealings with them over late filings, I never file until the last Oct. 15 deadline each year and have gotten to know they routines pretty good. They will be fair an equitable if you take the initative and control the process to the best of your ability. Good luck.

Ski, the problem he had was with his broker, not the IRS. Since they sat on his check, it didn't make it into the account on time. The IRS doesn't care whose fault it is, they'll still sock him for penalties if he doesn't fix this. He can blame the broker, but unless they offer to help him out by paying his tax penalty or something, there's really not much he can expect them to do for him.

Something similar actually happened to me once, so I may be able to help you a bit by sharing my experience. I have two Roth IRA accounts in my name, and so have to keep track of my maximum myself- my brokers don't know what I put in each others accounts, so if I go over the max in the combined total, they won't alert me. One year I made a contribution in one of the accounts after the year was over but before April, and I meant for it to go into the previous year. The broker messed up and put it in the current year instead. Not realizing that, I ended up puttting more into that year than I should have. I freaked out a little a year later when I figured out I had put more than allowed in for a year. I contacted both brokers and the IRS to figure out what to do. I got different answers from everybody, but the best help I got was from my full-service broker, Merrill Lynch. Scottrade was less than useless, and the IRS was helpful in that they explained exactly what would happen to me if I didn't fix the problem.

Actually the penalty for putting too much in a Roth IRA isn't all that bad- I think it's like 6% of the amount over the limit, or something, but the bad part is that with time it can get worse, since your gains over time will eventually get taxed and/or penalized when you start withdrawing it. Also, you have the potential to lose the tax benefit of the whole account if you're doing it on purpose. The remedy was to just take an early distribution of the amount in question, and just redeposit it for the current year. You'll lose the ability to make that amount in contribution for the current year, and your tax forms will be a bit more complicated (you have to file an early distribution form) but it's not a big deal. Merrill held my hand throughout, so it was really easy (after trying to deal with Scottrade over the issue for months- what a bunch of idiots over there). Next year, though, will be the advent of the Roth 401k, so if you're upset over the contribution you missed out on, you can make it up by diverting your paycheck to the new Roth 401k, and it's just like making an additional contribution to your Roth IRA. Essentially it does away with Roth caps for wage slaves like us. I'm going to bug my HR dept to implement this new type of 401k account, I encourage everyone to do the same, since most companies are unaware that the new option exists, and it's up to them to offer it to the employees.

[jiesen]

One other tip I learned from this experience is to always get your contributions to your Roths in by December. That way there'll be no question which year it goes into, and it won't ever be too late! The hassle a missed deadline can cause is definitely not worth the extra few month's interest/gain on a couple thousand dollars ($10-20?). Besides, you're really only paying that to your older retired self- tax-free!

[billyjoe]

Jiesen and Ski,
Thanks for the advice. Luckily Scottrade had nothing to do with this although I had problems with their online trading operation and dropped them a few years ago. You may remember me mentioning my 2 previous accountants ended up in the big house , well at least one of them did, the other got a deal after embezzling 300k. He had four small children so he's trying to pay it back. So far my current accountant seems legit but my fingers are crossed. Hey, if I end up at Web's joint will he give me a break? I hope this works out ok.

billyjoe

[skiracer]

Jiensen,
I don't have either of the two, 401 or Roth, so I guess I shouldn't be giving Billyjoe advice on those. But I do deal alot with the IRS regarding estimated taxes, filing late fees & interest charges, and payment schedules on all of it. The common miscomception is that they will come down and take your home or kids etc... I've found that when you go directly to them with an honest factual explanation of your circumstances and either propose a plan or ask them for something equitable from them to resolve your problem they have always been congenial with me. But you have to have the concrete info regarding what you are presenting or proposing. I'm always on a payment schedule with them over the estimated taxes for the businesses or from filing late.
I just thought that I would tell the broker that I was going to the IRS to explain the brokers mistake, if it was theirs, and wanted to resolve the matter as quickly as possible to stem the charges to me. The IRS should know how to expedite it asap and that will help ingnite a fire under the brokers butt. The brokers are usually sitting on their hands and probably were the cause of it in the first place. I wouldn't rely on the brokers to handle to much of the problem as they tend to move at their own liesure.
If he has to refile a couple of years then I would want to have control over that myself with my accountant. But now I see that he could be on shakey ground with his accountant.
Billyjoe, next to your wife your accountant is right up there in significance. Make sure you know him and can trust him to perform for you.

[jiesen]

Jiensen,
I don't have either of the two, 401 or Roth, so I guess I shouldn't be giving Billyjoe advice on those. But I do deal alot with the IRS regarding estimated taxes, filing late fees & interest charges, and payment schedules on all of it. The common miscomception is that they will come down and take your home or kids etc... I've found that when you go directly to them with an honest factual explanation of your circumstances and either propose a plan or ask them for something equitable from them to resolve your problem they have always been congenial with me. But you have to have the concrete info regarding what you are presenting or proposing. I'm always on a payment schedule with them over the estimated taxes for the businesses or from filing late.
I just thought that I would tell the broker that I was going to the IRS to explain the brokers mistake, if it was theirs, and wanted to resolve the matter as quickly as possible to stem the charges to me. The IRS should know how to expedite it asap and that will help ingnite a fire under the brokers butt. The brokers are usually sitting on their hands and probably were the cause of it in the first place. I wouldn't rely on the brokers to handle to much of the problem as they tend to move at their own liesure.
If he has to refile a couple of years then I would want to have control over that myself with my accountant. But now I see that he could be on shakey ground with his accountant.
Billyjoe, next to your wife your accountant is right up there in significance. Make sure you know him and can trust him to perform for you.

Happily, my wife is my accountant- that's one solution!

[IIC]

The IRS is very easy to deal with IMO...but you have to go to their offices and actually sit down with a real person to get anything done...And make sure you get it signed...I have never had a problem doing that...Brokers...Bunch of Nimrod MBA's...They don't know the first thing about taxes...At least from my experiences...And to be honest...98.2% of them don't know anything about how the markets work either...Doug(IIC)