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Help! I screwed up (but it may not be all my fault)

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  • Help! I screwed up (but it may not be all my fault)

    I received a letter from the IRS regarding my 2019 tax return. It says I significantly under reported my income that year as they had received forms from various banks and brokerages that I had not reported on my tax return. Two of them were from smaller savings accounts my wife had from before we got married and I had mistakenly forgotten to report these (couple of hundred dollars at most). The MAIN issue is a 1099-R form from Vanguard saying my wife received a $21500 retirement distribution. I right away realized that this is from rolling over a variable annuity to her brokerage account. The VA had in turn been set up to roll over a whole life policy that had been sold to my wife long before we got married. The whole life had a basis of $20k and the value at the time of transfer to a VA was about $16k. We then let the VA grow until had reached $21500 and then transferred it over. Am I correct in that if the basis of the whole life policy was $20k, then only $1500 of the "distribution" is actually taxable?

    The main problem is that the 1099-R form was never sent to us and I screwed up and forgot about it at tax time. A big error on my part, but I also cannot find the form anywhere on Vanguard's website. Turns out the got out of the VA business and TransAmerica is now running things. I assume the form exists somewhere and that if I get ahold of it, I should be able to show to the IRS that I didn't skip out on paying that much tax. They are asking for $13k in back taxes including a $2k penalty for tax underpayment.

    Furthermore, the CPA I used for that tax year (who i subsequently fired cause of lack of confidence in him) had nothing useful to add other than saying I could ask the IRS for "abatement"... Nevermind that I also realized that I have to amend my 2019 tax return because he screwed up on my 199A deduction (guess he did not know doctors don't get the full deduction for doing doctoring)

    Once I have the form... what do I do? How do I amend my taxes? I'm thinking I will pay the $13k penalty/back taxes and work on refiling

  • #2
    1. While Vanguard got out of the annuity management business, you should still be able to get the 2019 1099r. Use their search function for "Tax Center." Then you can get all past 1099r by year.
    2. You may or may not have to amend your tax return. In my experience, if the IRS sends you a letter requesting information (i.e., send us a 1099R to justify a deduction) you just send them the info. (I am 2 for 3 in winning these, and in the 3rd case it just wasn't worth the small amount they were charging me to fight about it anymore.) However, if you failed to correctly report these transactions (which is different that correctly documenting them), then you may have to revise.
    3. Personally, I would respond with the info they request, and include a letter of explanation, stating what you think your taxable income was with the 1099r's correctly documented. Then wait to see if that is sufficient for them to evaluate any taxes owed. They will definitely respond, but it would take a few weeks or a month.

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    • #3
      Originally posted by Larry Ragman View Post
      1. While Vanguard got out of the annuity management business, you should still be able to get the 2019 1099r. Use their search function for "Tax Center." Then you can get all past 1099r by year.
      2. You may or may not have to amend your tax return. In my experience, if the IRS sends you a letter requesting information (i.e., send us a 1099R to justify a deduction) you just send them the info. (I am 2 for 3 in winning these, and in the 3rd case it just wasn't worth the small amount they were charging me to fight about it anymore.) However, if you failed to correctly report these transactions (which is different that correctly documenting them), then you may have to revise.
      3. Personally, I would respond with the info they request, and include a letter of explanation, stating what you think your taxable income was with the 1099r's correctly documented. Then wait to see if that is sufficient for them to evaluate any taxes owed. They will definitely respond, but it would take a few weeks or a month.
      Probably more like 3-6 months based on my latest interactions

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      • #4
        Did you actually accomplish a 1035 exchange? If so, the 1099R should have shown code 6 in box 7. I know something changed about what was allowed a few years back and I’m fuzzy on the details, but I’ve posted about it on the forum before. It just hasn’t come up in a long time, either here or for clients. Sorry I can’t be more helpful but I’ll post again if I find it.
        Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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        • #5
          Originally posted by Larry Ragman View Post
          1. While Vanguard got out of the annuity management business, you should still be able to get the 2019 1099r. Use their search function for "Tax Center." Then you can get all past 1099r by year.
          2. You may or may not have to amend your tax return. In my experience, if the IRS sends you a letter requesting information (i.e., send us a 1099R to justify a deduction) you just send them the info. (I am 2 for 3 in winning these, and in the 3rd case it just wasn't worth the small amount they were charging me to fight about it anymore.) However, if you failed to correctly report these transactions (which is different that correctly documenting them), then you may have to revise.
          3. Personally, I would respond with the info they request, and include a letter of explanation, stating what you think your taxable income was with the 1099r's correctly documented. Then wait to see if that is sufficient for them to evaluate any taxes owed. They will definitely respond, but it would take a few weeks or a month.
          Thank you for the input.
          The strange thing is that the 1099-R form that the IRS is quoting is nowhere to be found on the website. I called Vanguard and they could not find it either and suggested that I contact Transamerica to see if they have the 1099R... crazy!

          I think my plan will be to proceed with paying the taxes so they don't pile more penalties and interest on it and work on refiling.

          To answer Joanna's question, I did not do the 1035 exchange and that was my screw up as I had completely forgotten to report the annuity conversion. It would have helped to receive the appropriate 1099-R form granted, but that's just an excuse, I should have remembered come tax time.

          Comment


          • #6
            Originally posted by DrRab View Post

            Thank you for the input.
            The strange thing is that the 1099-R form that the IRS is quoting is nowhere to be found on the website. I called Vanguard and they could not find it either and suggested that I contact Transamerica to see if they have the 1099R... crazy!

            I think my plan will be to proceed with paying the taxes so they don't pile more penalties and interest on it and work on refiling.

            To answer Joanna's question, I did not do the 1035 exchange and that was my screw up as I had completely forgotten to report the annuity conversion. It would have helped to receive the appropriate 1099-R form granted, but that's just an excuse, I should have remembered come tax time.
            Well, don’t give up yet. This would be an expensive bill to pay just because you made a mistake, and I think you can find the 1099R. Two additional paths to consider. Was the VA generated by an employer? If so, oddly, Vanguard holds the tax reporting forms for employer plans separately from the personal accounts. The advisors from personal system cannot see the data from the employer system. So, go to the Employer Retirement Plans Center and you will a tab for Taxes and Statements at the bottom of the page. The other approach is to call the employer’s pension staff. They usually have access to the Vanguard accounts.

            You could also try TransAmerica, but I think Vanguard is giving you a bum steer on that one, because Vangyard would have issued the 1099 in 2019, not TransAmerica.

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