The IRS wants to charge a retiree for moving his IRA CD, but he may be able to avoid getting taxed.

Question: Hi. I’m a retiree over the age of 70.5. I timely withdrew some IRA CD money as a personal check from the bank and then went to a different bank and opened a personal CD account. I believe this could be deemed an indirect rollover? Anyhow, the IRS has sent a hefty tax bill for not claiming interest earned. As a retiree, I did not intend to have to pay taxes now. I merely wanted to switch from an IRA CD to a traditional CD. Please Help! – Michael K. in New York

Jacob Dayan, Co-Founder of Community Tax, responds…

Hi Michael,

In general, you have 60 days from the date of an IRA distribution to deposit the funds into a new IRA for the distribution to be counted as non-taxable as a “rollover.”

If you met the “60-day rule” but the IRS is still saying you owe tax on the distribution, the next area to examine is how the rollover was reported to the IRS.

If you met the terms for a non-taxable rollover it must be reported as a rollover on your return, so the IRS knows not to charge tax on the distribution. If the transaction was not reported on your return at all, the IRS will eventually send a CP 2000 “under reporter” notice. This means they will designate the distribution fully taxable, unless you can prove it met the rules for a non-taxable rollover.

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If you did not report the transaction you should respond to the CP2000 “under reporter” notice immediately. You will need to provide proof of the date and amount of the distribution and proof of the date and amount of the new IRA. Then the IRS will remove the tax. If the transaction was reported incorrectly or if the IRS has already made the adjustments to your account and is sending you collections notices, then you will need to file an amended 1040X to properly report it and remove the tax.

As long as you created the new IRA within 60 days of liquidating the old IRA the distribution should be non-taxable. It sounds like your mission now to fix the problem is to ensure the transaction was properly reported and to make sure proof is sent to the IRS if requested.

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About the Author

Jacob Dayan

Jacob Dayan

Jacob Dayan was born and raised in Chicago and worked in New York City as a financial analyst at Bear Stearns. In 2009, he returned to Chicago to be with his family and pursue a career assisting consumers and small businesses with various financial needs. In 2010, he co-founded Community Tax LLC, a full-service tax company helping customers nationwide with all of their tax resolution, tax preparation, bookkeeping, and accounting needs. He’s a licensed attorney in Illinois who graduated Magna Cum Laude from Mitchell Hamline School of Law and has worked with more than 60,000 clients – resolving more than $400 million in tax liabilities.

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