Dear Tax Talk,
I received an IRA as a beneficiary in 2013 and paid all the taxes on it when I received it (or so I thought). I got an IRS tax audit in the mail stating that there were discrepancies for my 2014 return.
I received $60,000 cash and the rest was put into a brokerage account. I paid $6,000 in federal tax and $600 in state tax on the cash account. I thought this was enough and that was the last I had to deal with taxes. When I sent back all the 1099s to the IRS as proof I paid taxes on the money I received, the IRS sent me a letter saying the information I provided wasn’t sufficient and it would proceed with the collection.
I don’t know what my next steps are, as I thought I had paid off everything. How can I find out where this unpaid tax is coming from since I already paid taxes on my inherited IRA distribution? Please help! Thanks.
In order to determine where the tax discrepancy is coming from, you will need to very carefully compare the various numbers shown on your tax return to the IRS-calculated numbers shown on the notices they have sent you. The details are there!
Keep in mind that just because you had $6,000 in taxes withheld on the $60,000, that amount may not have been enough. You should have reported the IRA distribution on your tax return on line 15 and then reported the tax withheld from forms W-2 and 1099s on line 64.
It seems from your letter that you may not have reported the IRA distribution on your tax return, and that is why the IRS contacted you. Not having your tax return in front of me, I can only surmise that by increasing your income by $60,000 when you took the cash out of the inherited IRA, your tax increased by a lot more than the $6,000 in taxes that were withheld. That is only 10% of the gross amount, and it seems that you would find yourself in a higher tax bracket at that point.
Rule for IRA beneficiaries
Nonspouse beneficiaries of inherited IRAs have 2 options for liquidating their account: take distributions over their life expectancy, or liquidate the account within 5 years of the original IRA owner’s death. Read more in 8 ways to go wrong with an inherited IRA.
If you find the IRS notices overwhelming, you can always meet with a tax professional to assist you with understanding what happened and making sure everything is resolved with the IRS. This is an unusual situation for you as it involves an inherited IRA and not something you have probably had to deal with before, so don’t be too hard on yourself.
Thanks for the great question and all the best to you in resolving this matter.
Ask the adviser
To ask a question on Tax Talk, go to the “Ask the Experts” page and select “Taxes” as the topic. Read more Tax Talk columns.
To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Taxpayers should seek professional advice based on their particular circumstances.