Excess contribution for tax year 2014

Submitted by William Gordon on Tue, 2020-09-29 17:34

Upon the careless advice of an advisor at a medium-sized broker dealer, a client deposited $139,000 to an IRA annuity from his checking in August 2014 toward the goal of protection from creditors. The money in checking did NOT come from an IRA distribution but rather a non-qualified brokerage account. The custodian, thinking it did come from an IRA and that it was an indirect rollover, coded the contribution on Form 5498 as a rollover.

It came to his attention months later, in February 2015, that he had made a huge mistake. He received a letter from the IRS concerning it. He immediately withdrew the entire contribution, which at that point had lost $5,000 in the market. He nevertheless got slapped with a large penalty by the IRS.

I’ve read Publication 590 and several other inputs from the internet on excess contributions. It appears that he removed the excess contribution in time to avoid a penalty. It appears he had until the next filing deadline, Oct. 15, 2015, to do so. Thus it appears he should not have been subject to IRS penalties.

Or am I wrong?



Submitted by Alan - IRA critic on Tue, 2020-09-29 19:22

How was the removal executed? Did client request the removal of 139k as an excess 2014 contribution for which the custodian would calculate the net earnings attributed and return the net while issuing appropriately coded 1099R, or did the client just request a distribution of 139k without referring to an excess contribution? Such a distribution would generate a 1099R not coded as the removal of a 2014 excess.



Submitted by William Gordon on Tue, 2020-09-29 19:37

It was done as a formal reversal with no net earnings as the deposit had dropped in value. The distrubution was reported on Form 1099-R under code 8. By the way, I’ve had a CPA telll me it’s too late for him to approach the IRS about fixing it (assuming the IRS was wrong), that it’s past a statute of limitation. Is that acurate? That would be a shame. It was the IRS who told him he had no case.



Submitted by David Mertz on Tue, 2020-09-29 23:00

  • On the 2015 Form 1099-R the distribution should have had code P, not code 8, since the contribution was made in 2014 but not returned until 2015 prior to October 15.  Code 8 on a 2015 Form 1099-R would be reporting the return of a contribution made in 2015.
  • It does seem that the statute of limitations for filing a claim for refund has expired.


Submitted by William Gordon on Wed, 2020-09-30 03:11

I guess I’m not completely clear, DMx, whether the miscoding of the 2015 1099-R makes the distribution of excess contribution defective. If not, the man still owes the IRS $9,000. Wouldn’t it be sensible to re-present his case to the IRS to see if the 9k can be waived? 



Submitted by David Mertz on Wed, 2020-09-30 13:03

  • While the return of contribution might have been proper, an improperly coded Form 1099-R might lead the IRS to an incorrect assessment to which they might hold unless the Form 1099-R is corrected.  A code 8 2015 Form 1099-R would not have been indicative of any correction of an excess contribution made in 2014.  Note that despite the reporting of this on the 2014 Form 5498 as a rollover contribution, it’s a failed rollover that must be treated as an excess regular contribution, so the IRS would expect to see a code P (along with code 1 if the client was under age 59½) on a 2015 Form 1099-R for a return of contribution distributed in 2015 before the due date, including extensions, of the 2014 tax return.  If the IRS made no penalty assessment for 2015, the IRS apparently treated this as a return of contribution in 2015 *after* the due date of the 2014 tax return, perhaps as a result of incorrect coding of the 2015 Form 1099-R.  Outside of the code, the reporting on the Form 1099-R provides no information regarding the timing of the distribution.
  • The notice sent by the IRS would have provided the instructions and the deadline for appealing the assessment.  If the assessment was appealed with the IRS but the IRS did not change their position, the next step, also indicated in instructions provided by the IRS, would have been petitioning the tax court with the associated 90-day deadline to file the petition (150 days if out of the country).  It seems that we are long past these deadlines.


Submitted by David Mertz on Wed, 2020-09-30 13:37

Something about the timing of events doesn’t add up.  February 2015 is far too early for the IRS to detect this problem since the 2014 Form 5498 would not even have been issued by then.  If the client did not obtain the corrective distribution until after receiving a notice from the IRS, it seems likely that the corrective distribution would not have been made before the due date of the 2014 tax return. 



Submitted by William Gordon on Sun, 2020-10-04 21:44

I’m gathering more facts and more accurate information from my client as the days progress. The IRS didn’t get involved until March 2016, when it sent him a letter asking for an explanation of the distribution the year before.  In summary, excess contribution August 2014.Corrective distribution of the excess contribution February 2015.IRS sends a notice March 2015. We contacted the IRS on Friday and appealed to them to reconsider the facts of the case. They’re reopening it and asking for a written response. 



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