It is never a good day when you get an unexpected letter from the Internal Revenue Service. It is an even worse day when you get it a few days before Christmas. Inside the voluminous letter was a very firm request that I had better cough up $9468.32 immediately, which included interest of $438.02 for my alleged mistake on my 2004 tax return. Umm sure. And how was this money to suddenly materialize exactly?
It took me a couple days of deciphering the paperwork before I figured out what teed them off. They noticed that I had rolled over about $24,000 from one retirement account to another. They just did not believe me when I told them that I had actually redeposited the money into another qualifying plan.
You see, in 1987, I left the federal civil service payroll for about a year and a half for a job in the private sector. At that point, I was still young. I had been working for Uncle Sam for only six years. I did not figure I would be working for the federal government again. Therefore, I took out my $8000 or so in Civil Service Retirement System (CSRS) contributions. I redeposited the monies into an IRA account at the local savings and loan. Over the years, the money rolled over from one IRA to another without a problem. However, last year I decided there was no point in retiring on a reduced pension if I could redeposit my CSRS funds with interest for my first six years of federal employment. With a total of 21 years of civil service at that point, I knew I would hang on until retirement, if possible. Therefore, I decided to pay back the CSRS what I owed. With interest, it amounted to about $24,000. I got a check from Wells Fargo, who managed my IRA. I deposited it in my money market account. Less than a week later wrote another check to the Office of Personnel Management. I had 60 days to do a rollover. I did it in about a week.
Just to be perfectly clear with the IRS I attached a statement to my return explaining what I had done. I referenced their own regulations that said the CSRS qualified as a retirement plan and could be used for rollover contributions. I forgot all about it until this IRS letter arrived.
No said the IRS. You took out the money but did not redeposit it. Therefore, that is income. So cough up $9468.32 and you better do it really fast because the interest meter is running.
My wife, whose mother had many IRS troubles when she was a spry young thing, immediately went into panic mode. What she remembered from the many experiences is that when the IRS has you in its crosshairs, there is no escape. There is also no appeal. They are judge and jury.
I tried not to panic and tried to figure out what to do. What I needed was some way to return a volley. I needed a certified public accountant that specialized in dealing with the IRS. I found one and explained the problem to him. Apparently, retirement account managers tell the IRS when they disbursed and received rollover money. In this case, the recipient of the money was not some Wall Street brokerage firm. It was the federal government. Moreover, apparently, the Office of Personnel Management, which runs the CSRS, does not bother to inform the IRS about CSRS redeposits. Therefore, the IRS assumed I had not reported the money as income. The good news: the CPA could fix my problem for $1000.
I weighed the probability of successfully appealing my problem to the IRS agent versus letting a professional deal with it. I decided $1000 was a lot of money but if I tried to handle the matter myself, I probably was not going to win. Meanwhile I had to document that I had indeed rolled over the money within sixty days as required by law. Fortunately, I kept statements from both the brokerage firm and the Office of Personnel Management. In addition, it took about a week but I was able to get a copy of the canceled check showing my redeposit.
Case over? I hope so. Nevertheless, I remain nervous. Although my CPA has talked to the IRS agent, yesterday we received two new and bulky certified letters from the IRS (one for me, one for my wife). Once again, the IRS was sternly telling us to pay up soon or a tax court was going to come collecting. My CPA said not to worry. This was standard IRS intimidation tactics. Now that I had a copy of the canceled check and copies of the bank statements I mailed them to him.
I will not rest easily until I get official notification from the IRS that they were in error. That, my agent said, will take a few months. Meanwhile, I am thinking about my 2005 tax return. My hand has now been burned by the IRS. I figure it is time to stop using off the shelf tax software, and hire a tax preparer instead. Had I done this last year perhaps I would not have been in this current mess. Not that I was at fault. The IRS instructions said nothing about having to submit proof with my tax return that I had in fact rolled over the money. All the instructions said was that I had to do was roll it over within 60 days.
However, I suspect I am now on their radar. Like Bush’s No Fly List, I am betting that once on it there is no way to get off it. Therefore, I will probably have to spend a couple hundred bucks a year to let someone else do my taxes. Apparently commercial tax software is no longer good enough. I need someone who knows that the IRS really requires more than what apparently is in their instructions.
I am assuming I can at least deduct these expenses. I had better check with my tax advisor first.