In September I received a letter from IRS stating that I owe $7,000 in taxes on IRA distributions.
I didn't take any distributions!
The IRS letter stated that I took 3 distributions from my IRA, each of the distributions were $5,000.
The IRS was wrong on that. Those were not distributions, these were same year Back-door traditional IRA to ROTH IRA conversions.
You would think that IRS should know better. They have all information in their hands: my tax returns which clearly state each of the conversions and the 1099R forms from the broker which state that those were conversions.
Why did they still sent me the letter?
They probably didn't bother to look at documentation. That is my guess because for anyone who will take a look at the tax return will see that everything is documented appropriately. And what about the corresponding 1099R forms they have received from the IRA broker? Maybe the broker didn't report the conversion?
I checked the accounts and it looked like the broker did report the conversion to IRS. All forms were on file.
Even if I knew that I was right, it was a bit stressful to see $7,000 in owed taxes in the IRS letter.
First I tried to look up online what others did in such situations. I could find only a few mentions on forums and blogs. Most people called IRS and explained to the IRS person the issue on the phone. Some did mail documentation to them. Usually the issue was resolved.
What did I do?
Since it seemed that IRS already didn't do their diligence in checking the appropriate paperwork, how could I trust them to solve the issue on the phone? I wouldn't be able to document that phone call and anything they would tell me. In such an important issue I needed my own documentation.
I decided to mail in the supporting documentation without calling them. I mailed it with a tracking number and return receipt. $7,000 are worth that trouble.
My CPA wrote a detailed letter to the IRS and attached the copies of the tax reports with marks pointing exactly where the conversions were reported.
I also attached the forms 1099R forms from the broker. The forms were available online so I didn't have to call the broker.
But I called them anyway and asked when do they submit those forms to IRS. The customer service representative said that the forms are automatically sent to the IRS as soon as they are issued.
The IRS gave me about 3 weeks to respond to their letter. I mailed the response in time.
I was tracking my response letter and saw that it was received before the deadline.
Two weeks after that I got a letter stating that they have received my response and are working on it.
Then one month later another IRS letter arrived which stated that the issue was resolved and I owe no taxes.
