What one never wants to receive: a notice from the IRS

About April 26th or so I received a notice from the IRS.  The notice concerned my 2010 Form 1040.  The notice states I owe $6,548.

I  knew almost instantly why I received the notice.  As I read through the 12 page notice, my suspicions were confirmed on page 7.  The IRS noted I withdrew $14,375 from a retirement account in 2010 and failed to claim this gross income on my Form 1040.

So why wasn’t I surprise?  Because I specifically informed my tax preparer about this withdraw and had included all of the paperwork I received from Vanguard.  What did my tax preparer tell me?  You don’t need to include this income on your tax return.

To provide more background information, I withdrew $14,375 from my Roth IRA in 2010.  In speaking with the Vanguard representative I was careful about what I was withdrawing (earnings, not contributions).  During my extended conversation with the Vanguard representative I was cautioned to make sure I file Tax Form 8606.

In early 2011 among the tax related records I received was a 2010 Form 1099-R from Vanguard stating there was  a gross distribution of $14,375 from my Roth IRA account.  As you can probably guess I, The Money Heifer, am very meticulous.  Each year I prepare a binder with all my tax related documents for the tax preparer.  I make things easy for him, for instance, by listing all my charitable contributions on an Excel spreadsheet and printing out reports from my Quicken Rental Property Management software.  I have also developed the habit of including a letter to my tax preparer at the beginning of the binder noting any changes  or bringing specific matters to his attention.  With regard to my Roth IRA Distribution I wrote

$14,375 w/drawn of contributions I made over the years.  These contributions were made more than 5 years ago.  Funds received were strictly my contributions, no earnings.  The distribution is tax free & penalty free.

I did not mention Form 8606 because, hey, he’s the tax preparer and has been doing this for years.

When the tax preparer completed my 2010 Form 1040, he told me did not include the $14,375 distribution from my Roth IRA.  I asked why.  He said from what he reviewed there was no need to declare this income.  I responded, are you sure?  He said yes.  I then mentioned the Vanguard representative was insistent that I file the appropriate tax form regarding this distribution.  My tax preparer again stated I was not required to list this income.

So you can imagine how steamed I was when I received the notice from the IRS.

Of course I promptly called my tax preparer.  I subsequently hand-delivered a copy of the notice to him.  BTW, I had to respond to the IRS by May 23, 2012.

In a follow-up conversation my tax preparer, he asked me to bring certain additional paperwork for his review.  I complied.  He then prepared a response.  When I stopped by his home to review the response, my tax preparer commented, maybe the Roth IRA distribution should have been disclosed (hmm, a johnny come lately).

On April 28, 2012, by certified mail/return receipt requested, I sent my response with accompanying paperwork to the IRS.

On June 1, 2012 I received correspondence from the IRS acknowledging receipt of my response on April 30, 2012.  The first full paragraph of the IRS correspondence states,

We will contact you again within 60 days to let you know what action we are taking.  You don’t need to send us anything further or take any other action now on this matter.

Yesterday I received the following correspondence from the IRS.

Your 2010 Form 1040 inquiry is closed.  Amount due:  $0.00

Thank you for your response to the notice we sent to you about your 2010 (Form 1040) taxes.  We’re pleased to tell you that the information you provided resolved the tax issue in question and that our inquiry is now closed.

A happy ending, indeed.  But all of this could have been avoided if my tax preparer had listened to me.

So now I assessing whether to continue with this tax preparer.  The previous year he made a mathematically error [who doesn’t occasionally].  My federal refund was $1,000 less than he had calculated.  Okay, that’s not a big deal.

My tax preparer has remarked on a few occasions that I am so organized that I really didn’t need to have him do my taxes.  Over 10 years ago when I owed money to Uncle Sam, this tax preparer saved me $200.  I was pleased.  I didn’t need his services again until tax year 2005, when I began to rent my condo.  This tax preparer has handled by taxes ever since then.  The idea of reading the instructions about depreciation or repair versus replacement really turns me off.  But, I think it’s time for The Money Heifer to prepare her own taxes.  Plus, I’ll be saving $165/year.

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