I have an IRA Tax question? ?

Question

Ok...In 2006 my accountant had me opem an IRA with him, I put in $4,000 and received a $1,000 back on my return for that year (additional) for doing so. Now I get a letter from the IRS saying that I owe them $1,025 plus interest.

I questioned my accountant and he said that I did not have any other retirement plan that year (wich is not true) he knows I had a 401K at my work.. I think he is getting over on me... Any thoughts??

Answer 1

It looks like you were not eligible to take the IRA deduction due to your participation in the 401K. I feel that your accountant should have determined if you were eligible. He also could determine if you were a participant in a 401k simply by reviewing you W-2. I feel he could have done a better job. You may want to ask him to reimburse you for any penalty assessed.

You should pass the IRS notice to him and ask him to first try to get any penalties abated.

Answer 2

seems a little weird for an accountant to be an IRA rep - do you get quarterly statements for the IRA? where exactly did he invest your money?

Answer 3

you decided to take 1000 back, you can assume that 25.00 of this was a fee, and interest accrues because you took it out for spending.  Typically, this is the way IRA accounts work, and any account where you are expecting them to hold money for you long term.  I would advise you to read bank contracts thoroughly before signing and agreeing to its terms.

Answer 4

Look at your W-2 for 2006, Box 13.  If the Retirement Plan box is checked, you are limited in your allowable deduction for IRA.

If the IRS is saying you owe that money, it is either because the deduction wasn't allowed, or the contribution was never made in the first place.  

Did you receive a Form 5498 in 2007 for your account?  Who is the trustee for the account?

If your deduction was disallowed, then you have some more work to do, and additional taxes to pay.  You have to convert that IRA to a nondeductible IRA, or you have to get your contributions plus earnings out all together.  In either case, you will have taxes and penalties to pay.  You will also be assessed a 6% excise tax for 2007.  If your accountant can straighten this out, he needs to.  Or, get another tax person to do it.

If no contribution was made at all, then you need to track down who has your money.  Since you say you opened your IRA "with him" you have some questions to ask this accountant.

Answer 5

A good tax preparer will pay any penalties that  you would owe due to their mistake.

Not the tax itself - as you would have owed that in the first place (or not received refund), but penalties.  Most tax prep companies do this.  Liberty, H & R Block...if your accountant is not willing to stand behind his work, I would consider using someone else.