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Category: Tax
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Experience:  over 40 years experience in tax matters
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I received a letter from the IRS that I owe funds. I received

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I received a letter from the IRS that I owe funds. I received a distribution from an IRA Distribution code 1 in 2008 for the amount of $4270. The initial deposit in this account was $5,000 but after losing some funds, I decided to move the money. After receiving the $4270, I wrote a check for $4300, to deposit in a Roth IRA, within 30 days . Why do I owe money when I rolled the funds over?
Submitted: 6 years ago.
Category: Tax
Expert:  CGCPA replied 6 years ago.
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Charles Greiner :

If the withdrawal was from a traditional IRA and you deposited the funds into a Roth IRA you owe taxes on the distribution. The reason for this is that you are dealing with two completely different types of IRA's. In a traditional IRA the money is not taxed until withdrawn while in a Roth IRA it is taxed "up front" and if it is in the account for 5 years AND you have attained age 59.5 at the time of the withdrawal the distribution is all tax free. That said, if the withdrawal was from a Roth and it was placed into a Roth then you need to notify the IRS of their misunderstanding and submit proof of a timely rollover.This can happen if the old custodian (bank) and the new custodian are not the same since the old bank is required to notify IRS of withdrawals while the new custodian is not required to notify IRS of the rollover. Either way, you do need to deal with the IRS or they will assess interest and penalties and the matter will not simply go away. In fact, the IRS will notify your state of residency in 2008 that they have changed your return and the state will also begin their interest and penalties. Both the IRS and most states have become aggressive with their collection practices and can literally make life miserable. Please deal with this as a somewhat urgent matter.

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