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jgordosea
jgordosea, Enrolled Agent
Category: Tax
Satisfied Customers: 3007
Experience:  I've prepared all types of taxes since 1987.
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I took 10,000 dollars from my ira account in 2007. I forgot

Customer Question

I took 10,000 dollars from my ira account in 2007. I forgot to report it in the 2007 return. The 2007 tax return is jointly done with my husband. The IRS is asking me for more than $4000 now. My husband is not willing to pay and I don't have the money to pay. What can I do?
Submitted: 4 years ago.
Category: Tax
Expert:  jgordosea replied 4 years ago.
Greetings,

My suggestions (and not legal advice) are:

First, you can and should answer the letter within any time frame specified in the letter even if the only answer you have is to say that you are still working on determining if you do, or do not, agree that you owe additional tax.

Second, you can and should get your husband to understand since he signed the return that he is very likely jointly and separately liable for any underpayment on the return if he knew (or should have known) that you got the $10,000 from the IRA when he signed the return. That is, whether or not he would like to pay additional tax that it is indeed his liability as well as yours. In fact, most times both spouses will separately receive the same notice of any proposed changes to a joint return. This may be best done along with the third item.

Third, you can and should determine that you indeed are liable for the proposed addition to tax (as it seems you may be since you admit you "forgot" to report the income). For this you may want to employ a tax practitioner to review your 2007 return to see if there are any other items that need to be changed and to verify the computations made by the Internal Revenue Service.

Fourth, once you determine the amount of additional tax that you indeed do owe for 2007 you can and should request abatement of penalty if you can show any reasonable cause for not including the amount on the original return. An experienced representative may also be useful in this task.

Fifth, if you do agree that you owe additional tax and can not currently pay the full amount you can and should consider an installment payment agreement or other options (such as offer in compromise or being placed in not currently collectible status) for you to avoid collection action. Again, an experienced representative may be useful to explore your options.

You will have to decide whether you will pursue these actions with or without representation. Only attorneys, CPAs and Enrolled Agents (EAs) can represent taxpayers before the IRS on these types of matters. If you used a preparer for the 2007 tax return that person can represent you (at least in part)even if he is not an attorney, CPA or Enrolled Agent.

As an Enrolled Agent, my biased opinion is that representation will be valuable in this matter. You can find an EA in your area by searching at https://portal.naeacentral.org/webportal/buyersguide/professionalsearch.aspx
Most representatives will meet with you to discuss your case and the services that they can provide at little or no cost.

I hope this helps for some suggestions of what you can do.
Best wishes.
jgordosea, Enrolled Agent
Category: Tax
Satisfied Customers: 3007
Experience: I've prepared all types of taxes since 1987.
jgordosea and 9 other Tax Specialists are ready to help you
Customer: replied 4 years ago.
Why is IRS asking for more 4000 for a 10,000 withdrawal? What is the interest they are charging? Is there a rule or they just assign whatever interest?
Expert:  jgordosea replied 4 years ago.
Hello again,

The notice should include a break out of the amount of tax, interest and penalty that is included in the total proposed adjustment.
If you can not find those items you can call the IRS yourself or take the notice when you confer about hiring a practitioner and the practitioner should be able to find those items.

For an additional 10K the income tax may be anywhere from 15-33% depending on your marginal tax rate. So that would be 1,500-3,300 income tax.

Also, if you were under age 59 1/2 or if the Form 1099-R had code 1 for an early distribution there may be proposed an additional 10% tax for early withdrawal. If that tax is included it is definitely an item for you (and your representative) to look at whether you agree it is owed or if you meet one of the exceptions to that tax. See the article at http://www.irs.gov/taxtopics/tc558.html for basic information on that tax.
That tax could be as much as 1,000 if it applies in full without exception.

Penalty for underpayment can be up to 25% of the amount not paid with the return. So, 2,500 due with the return would then be 3,125 after the penalty.

The rate of interest is set each quarter and has been between about 8% and 4% since 2007. For an example of the announcement please see http://www.irs.gov/newsroom/article/0,,id=212017,00.html
At about 6% annual interest roughly over the years (and it is very roughly done here) 3,200 of tax and penalty would be about 4,000 now.

All of these items should be reviewed to determine if you do or do not owe.

I hope this helps give an idea of how the tax plus penalty plus interest on $10,000 (even at 15% tax rate) could be proposed to amount to 4,00 proposed as due now if all these items apply to your facts and circumstances.

Best regards.





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