A couple years ago I took out my contributions from a Roth-ira that wasn’t performing at all. Maybe it made $800 in 5 or so years. I got a letter in the mail today saying I didn’t declare the money as income and now owe $8000 in back taxes and penalties. Anyone have experience with this? I was under the impression that withdrawing my contributions were tax free?

How old were you at the time of withdrawal?

Withdrawl of contributions are non taxable. Earnings have taxes and possible penalties if you don’t meet the 5 year and 59.5 age rules.

IRS most likely got a copy of the 1099r from the withdrawal and your account got flagged for not claiming that withdrawal on your taxes.  If the way you described it is accurate it should be very fixable, will probably just require a letter explaining the situation to be sent to the examiner.  Call your tax guy and I’m sure they can take care of it for you.

I got on a payment plan when I owed $18.000.

Well under 50.

I’m Calling a tax attorney tomorrow. It just shook me when I opened the letter. The account was stagnant and wasn’t making anything so I pulled it and I guess Shwab notified the irs. I’m hopeful it will get resolved.

If it's a Roth then you only pay taxes on the gains and a 10% early withdrawal penalty.

How much exactly did you take out?

About $18k.

You don't need an attorney, just respond as the letter instructs. Probably send an amended return and a letter explaining the situation. Any decent tax practitioner could handle this.

Covid had some rule changes with regards to IRAs and 401ks.  

Make sure to look into that

You can withdraw your contribution from a ROTH IRA tax and penalty free, as it is after tax dollars being contributed.  

Write the IRS a letter an explain exactly what you did.

I also do not think you need an attorney.

This. A tax attorney will take $1,500 to solve a simple issue..

Thanks for all the responses!  I will hold off on the attorney for now and see if a tax person can help me navigate. I would try doing it myself but the letter reads like mandarin to me

If your retirement investments aren't showing a good return, look at your investments. You can change what you're invested in, within the traditional IRA or Roth IRA or 401k without any tax consequences.

Your investments don't always go up, but most of them will eventually. Time in the markets is better than trying to time the markets.

To get your retirement accounts to a relatively substantial amount (at least that point that it makes more than you are contributing each year), your contributions are driving the growth. The more you can contribute, the faster it's going to grow.

this.  (ROTH IRA...)

you will need some forms proving that $8,000 was your 'basis' -- your CONTRIBUTIONS -- not income / appreciation.  

don't sweat it -- but you have to so some forensic accounting with the financial company

DO NOT do this by yourself. Get your tax preparer to do it. If you did your own taxes, find a lawyer who specializes in tax issues to handle it.

Would you represent yourself in a murder trial? The IRS is not seeking truth and justice. They want a win and the negative consequences to you are irrelevant.

+1

Our medical clinic closed in 2021.  We get a letter from the IRS a year later that we owe $50K for 2021, when we should have received $15K back.  The accountant had made a mistake on the return and we tried to have her fix it but she sent in the same exact return without amending it.  She’s a dumb dumb.  I was conveniently named the president of the clinic when it was shut down so I had to deal with the mess.  Since the accountant was useless, I hired a tax attorney and he was great.  It took him 2 years to un-fuck the mess but in the end we didn’t get the $15K back and had the attorney’s fees for the 2 years.  I’m hoping it’s all over but who knows.  The IRS is difficult to deal with and I would not want to do this without an attorney.  

I think OP needs to start running and never look back.

The tax man cometh.

You need to contact one of those companies that advertise constantly on the radio.
They'll have that $8000 payment whittled down to .87 cents.

Yeah, if you had included the withdrawal on your return there is somewhere in there to indicate you were withdrawing the contributions but since you didn’t include it they don’t know that.  A tax guy could probably file whatever needs to be filed to clear it up.

Not so fast on the lawyer.  This is not a murder trial.  Its a $800 bill that will get reduced by a lot with some communication with the IRS.  I got audited a few years ago and got a six figure bill.  Some communication with the IRS and the agent simply told me to send schedule XYZ and that pretty much took care of it, once I got the right guy on the phone that could tell me what was missing.

Respond by the date on your letter, open a dialogue with the IRS.  My experience was that they did want to get down to the correct amount owed, not stick it to me.  The agents helped me get it reduced, actually mostly eliminated.  It was the IRS agent that told me how to do it.

This is a fairly easy fix. Just respond as the letter instructs, telling the IRS what happened.

It sounds like you closed the IRA, so you'll have some taxes, plus penalties and interest, on the gains. Once you pay the amount you owe, call the IRS back and ask if you qualify for First Time Penalty Abatement. If you do, the IRS will waive penalties and interest which have accrued and refund them to you. It's important to pay them first, though, as one of the things which qualifies for FTA is a Failure To Pay penalty. If you ask about it before you've actually paid the taxes, you'll get a new FTP penalty the following day and you've already shot your wad with FTA.

This is part of what I do for a living.

You should always be able to take out money that you put into it tax free regardless of age. Any gains that occurred in the account have to remain until 59.5 or there are taxes and penalty.

The company disbursing the funds should have advised you of the tax implications.

If you had to pay 8k on taking out 18k, it sounds like someone didn't record your cost basis.

Article:

ROTH IRA 60-DAY ROLLOVER RULES
Friday, October 04, 2013
By Beverly DeVeny, IRA Technical Expert?
Follow Me on Twitter: @BevIRAEdSlott

Many times we get the question “Do the 60-day rollover rules apply to Roth IRAs?” The answer is, yes.

When a distribution from a Roth IRA is made payable to the Roth account owner, the owner has 60 days from the date he receives the funds to roll the funds over to another Roth IRA. This type of rollover can only be done once every 12 months. No other rollovers can be done out of either the distributing Roth IRA or the
receiving Roth IRA. Funds can still be rolled into those accounts though.

But, funds are not locked in those accounts for a year. Even though you cannot do another rollover you can still do a direct transfer of any of the funds in either Roth account to another Roth IRA. A Roth recharacterization can also be done from either account because it must be done as a direct transfer.

A rollover from a Roth 401(k) (or similar employer Roth plan) does not count. If the check from the employer is made payable to the plan participant, the 60-day rollover period does still apply but there is no once-per-12-month limit.

Funds that are not eligible for rollover, but are nevertheless rolled over, become excess contributions in the receiving account. Excess contributions are subject to a penalty of 6% per year for every year they remain in the account. The penalty is reported on Form 5329, which is filed with the account owner’s federal income tax return. If the form is not filed, the statute of limitations does not start to run on the penalty.

All of the above limits and potential problems can be eliminated by doing direct transfers. Instead of having a check made out to the individual, it should be made out to the receiving institution for benefit of the individual’s Roth IRA account. Then there is no 60 days to worry about, no once-per-year rule, and no worries about excess contributions.

IRS can allow extra time to complete a rollover in limited situations. The catch – the fees you have to pay. The extension can only be granted by requesting a private letter ruling. The IRS fees range from $500 to $3,000 depending on the amount of the rollover. In addition, you have to pay someone to prepare the ruling request. There is no guarantee that IRS will grant any request. If the request is denied, there are no refunds.

I was in an almost identical situation to the OP years ago.

I wrote a letter myself, explaining what I did and why I didn’t owe them money. A few weeks later they wrote back, and the issue was resolved.

It’s not super complicated. If you withdraw principle from a ROTH, you don’t owe money. But the IRS wouldn’t have any way of knowing that’s what you did.

If you have someone prepare your taxes, speak with them.

Otherwise, phone up the IRS or visit their office if they have one locally and explain things to them.

Either of these should sort things out pretty quickly and you don't need an attorney.

Remember there is NO PENALTY, when the IRS makes a mistake, only suffering.

If you rolled it into another account, such as an IRA, the earnings may very well be non-taxable.  I have had this happen, but I caught it before it got to any penalty letter.  

If you decide you want a little help, do some research into accountants in your area.
You want one that is both an Enrolled Agent, and one that once worked at the IRS.

My tax guy is both, and he is awesome.

Jay

The 5498 shows the money going in.

The 1099R shows the money going out.

As others have mentioned, you may owe taxes on any “gains” you may have withdrawn.

Why not call the IRS about it?

I plan on calling first thing in the morning. A lot of great info on this thread has really put me at ease.

Did you include statements from the company? I’m hopeful it goes as easy as yours

I don't remember.  I might have included a statement from my Roth account showing my contributions for 2010 or 2011 or whatever year it was.

But from my reccollection, my letter was just a couple sentences.  "Mr. IRS Man, the money that I withdrew from my ROTH IRA, that you say I owe tax on, were the contributions that I made for calendar years 20XX or 20XX.  These contributions are after-tax dollars, and can be withdrawn tax and penatly free from a ROTH at anytime.  I am requesting confirmation that you have received this letter and my balance owed to the IRS is $0."  Or something similar.  And no kidding, they wrote back a month or so later saying I owed them $0.

It still wouldn't hurt to try and call the IRS (good luck getting somebody on the phone), or talking to your tax dude if you have one.  I certainly wouldn't hire a lawyer yet.

Good luck.

Substantial penalty for early withdrawal

I got sent a tax bill for interest and penalties for tax year 2018, for a sum of money that wasn't even paid until 2019, which funds weren't even taxable by law.

And its taken almost 2 years to fix.

When I called the IRS 1-800 number, the customer service person told me I was asking too many questions, hung up on me.

Land of the free......

Yeah right

Here's a simplified summary of the rules.  Read the IRS publication for details.

https://www.schwab.com/ira/roth-ira/withdrawal-rules

I'm guessing the age and minimum Roth holding period is what got you.  Maybe you can find one of the allowable exemptions that will reduce the tax and penalty you owe.

My luck lol

Stop.  

Make a few copies of the letter.

Sit down and focus.

Read it slowly. Highlight. Underline. Etc.

Tell them to fuck a tranny as they have fucked you long enough