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Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 22776
Experience:  Taxes, Immigration, Labor Relations
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I had an IRA from a former job. I had to take early withdrawl

Resolved Question:

I had an IRA from a former job. I had to take early withdrawl when my fiance got cancer. I figured the 10% penalty and added the amount to my gross income. The IRS says I owe additional tax - despite my inquiries they won't say why. I asked for and received a "transcript" which merely had a line item saying: additional tax $2800. The only thing I can think is that the withdrawl is subject to self-employment tax... is it? I was self-employed (actually unemployed, taking care of fiance during chemo) at the time of withdrawl.
Submitted: 11 months ago.
Category: Tax
Expert:  Lev replied 11 months ago.

Lev :

Hi and welcome to our site!
IRS distributions are NOT subject to self-employment tax.
However - your income tax liability is determined on your total income.
The purpose of withholding is to cover possible tax liability - but the amount withheld is not your tax liability.
Your tax liability is based on your total income filing status, deduction, etc.
If withholding is less than your tax liability - you have to pay additional taxes, but if withholding is less than your actual tax liability - there might be a refund.
I will help you to estimate your tax liability if you provide information about your income and withholding.

Customer:

Sure. Form 1040 from year 2010.

Lev :

That that is your tax liability from 2010 - correct?

Customer:

Business income: 5602. Capital Loss (243). IRA distributions: 16958 Deductions schedule A: 14406. self employment tax: 791 Additional tax on IRA (10%): 1696. Amount from previous year: 834.

Customer:

Yes, 2010. I filed late, but the penalties are small. I'm concerned with the $2800 additional tax.

Lev :

are you getting these amounts from transcript or from form 1040?

Customer:

From my copy of my return. When I requested a transcript they sent me a summary that does not correspond to the line items of the form, rather a summary of what they did.

Customer:

My schedule A is simple and accurate: mostly the interest and tax paid on our house.

Lev :

Just as an estimate - your adjusted gross income would be 5602(business) - 243(capital loss) + 16958(IRA distribution) - 455(self-empl tax deduction) = 21862 -
Here is the form for 2010 - http://www.irs.gov/pub/irs-prior/f1040--2010.pdf
21862 should be on line 37 - please verify.

Customer:

I only listed 396 for one half of my self employment tax, giving me 21927 on line 37.

Customer:

I also got 6 in dividends.

Lev :

Ok - so let's ignore small differences for now.
Your deductions 14406 (from schedule A) + 3650 (personal exemption)
So - your taxable income on line 43 is expected to be 3880 - can you verify that?

Customer:

I get 21927 - 14406 - 3650 = 3871 on line 43

Lev :

ok - that is very close - so 21927 includes your dividends - correct?

Customer:

yes

Lev :

and on line 44 - you have 388 regular tax -correct?

Customer:

exactly.

Customer:

Line 58: 1696 (10% of IRA dist)

Customer:

Line 56: 791 self-employment

Lev :

line 60 - 388 + 791 + 1696 = 2875 - that should be your total tax liability

Customer:

Line 62: 834

Customer:

Line 63: 347 (can I take that?)

Customer:

yes

Customer:

Total payments Line 72: 1181

Customer:

Line 76 1694

Lev :

all seems correct.
so my question is was your tax return accepted by the IRS?
Do they have all that information?

Customer:

They must. The summary they sent listed an adjustment to my total tax with no explanation.

Lev :

In adjustment letter - them must reference to items they adjusted... please verify

Customer:

Schedule C maybe? I've been filing those for 15 years with never a hiccup.

Customer:

Let me check, I have the letter right here.

Lev :

Do you see any difference in business income?

Lev :

Also - did you ordered a tax return transcript or a tax ACCOUNT transcript?

Customer:

The sumXXXXX XXXXXsts the values from my return as submitted

Customer:

Their changes are only listed. The relevant line:Additional Tax Assessed. $2875

Customer:

No reason given.

Customer:

Yes, it is the account transcript.

Lev :

So - if the IRS made adjustments - and you are not clear what these adjustments are - you need teh tax account transcript.
On form 4505T - check the box 6a - http://www.irs.gov/pub/irs-pdf/f4506t.pdf
Account Transcript, which contains information on the financial status of the account, such as payments made on the account, penalty assessments, and adjustments made by you or the IRS after the return was filed.

Customer:

I think that's what I have...

Customer:

It lists the additional tax assessed, just not why.

Lev :

I may only suggest to contact the IRS and clarify exact items they adjusted.
I do not see any issues with your tax return - and we may not say anything without that additional information.
We need to know exact items they adjusted and why.
You may simply call the IRS - but should be prepared to wait some time.

Customer:

When I called I requested the transcript I have here... nobody could tell me why they made the adjustment, which is infuriating.

Lev :

do you have form 1099R for that distribution with you?

Customer:

As a bit of detective work, what would the amount be if they included the 16958 in the amount used to figure the self employment tax?

Customer:

Would it be around $2800 additional tax?

Lev :

no - that is not subject of self-employment - never.

Customer:

I realize that, but could they have made that mistake?

Lev :

Do you have form 1099R for that distribution with you?
Can you tell me what are reported on that form?

Customer:

I don't, but I'm sure it was taxable distribution.

Customer:

But I'm obviously including it, plus the 10%, in my return.

Lev :

I am trying to think about possible options...
when distributed - did you have any withholding?

Customer:

No, but that would make my return better, not worse.

Customer:

Just for giggles, what would be the self employment tax for 22323?

Lev :

yes - I am just thinking about possible discrepancies...

Lev :

13.3% in 2010 - $2970

Customer:

Hmmm, only 2179 additional

Lev :

When you ordered transcript - did you check box 8 - to get information about all reporting forms?
There should be that 1099R form included - can you verify on your transcript?

Customer:

What about the Making work pay thing... can I take that?

Customer:

If they disallow that, plus they made the mistake of subjecting the IRA to tax, it's 2526. Not exact, but close.

Lev :

If you timely filed your tax return - yes. I think the deadline was October 2011.

Customer:

I guess I'm going to have to call. Having you confirm that my return seems right is good to know. And you did answer my basic question: is the IRA distribution subject to self employment tax.

Lev :

it is not - we just need to verify if that was reported correctly on 1099R form.

Lev :

Please update me with your findings.

Customer:

I will. It will be a while, as the hold times are long! I'll pass on what they did.

Customer:

This is my first time on this site - if I rate you now, can I still contact you with the update, or should I leave it open?

Lev :

I would appreciate your positive rating - so I would be credited.
But you are welcome back any time.
I might be not immediately available but surely will reply.
Please also verify all reporting forms - it might be you missed some income items that were reported to the IRS.
Generally - your transcript should include all these reporting forms.

Customer:

I'll rate you now. I'll let you know what comes up. Thanks!

Lev, Tax Advisor
Category: Tax
Satisfied Customers: 22776
Experience: Taxes, Immigration, Labor Relations
Lev and 3 other Tax Specialists are ready to help you

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