Owe More Taxes On Inherited IRA Distribution? IRS Yes
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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.
— Allie iStock/Enrico Fianchini
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.
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— Allie iStock/Enrico Fianchini
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.