December 1, 2015
When does the IRS deny a 2010 IRA contribution deduction? When it had already denied the deduction in 2008.
Stephen Dunn, a 50-year-old married taxpayer, found himself in these circumstances in a recent U.S. Tax Court case.
Dunn was employed by a law firm for the first part of 2008. Significantly, he was an active participant in the firm’s qualified retirement plan. He became self-employed in late 2008 and remained self-employed throughout 2010.
Dunn had made two contributions to his Vanguard IRA account, which he designated as 2008 contributions. The total amount of the contributions was $6,000. This amount is the deduction limit for a taxpayer age 50 or over for an IRA contribution – provided he is not an active participant in an employer’s qualified retirement plan.
Dunn’s tax return was audited for 2008, and the IRS disallowed the $6,000 IRA deduction.
Dunn made a $6,000 IRA contribution the following year and designated those contributions for the 2009 tax year. He was not an active participant in an employer’s qualified retirement plan for that year.
Dunn made an $800 IRA contribution for the 2010 tax year. But on his 2010 jointly filed Form 1040 return, he claimed an IRA deduction of $6,000.
The Form 1040 return for 2010 was subsequently audited by the IRS, and $5,200 of the $6,000 deduction was disallowed.
Dunn took the matter to the U.S. Tax Court. He at first tried to raise the argument that the 2008 contribution was an “excess contribution” that could be deducted in future years. An IRS Code section strictly defines what an excess contribution is.
An excess contribution is an amount contributed to your IRA account that exceeds your deductible amount. Dunn’s deductible amount, given his age, was $6,000. He contributed $6,000 to his IRA account that year. Therefore, he had no “excess contribution.”
His second argument was that, after the disallowance of the IRA deduction in 2008, he should be allowed to roll over his contribution amounts. Unfortunately for Dunn, he provided no support for this position, such as an Internal Revenue Code section, regulations or a court case.
Dunn’s investment company, Vanguard, is required to provide information to the IRS regarding customers’ IRA activity on Form 5498, IRA Contribution Information. This form clearly spells out that the only contribution made to Dunn’s IRA account for 2010 was an $800 contribution.
Dunn had never submitted what is called a “redesignation” request to Vanguard. His Vanguard paperwork clearly spelled out that his $6,000 contribution was for 2008. Because of this and the other facts and circumstances of the case, the court ruled against Dunn and disallowed $5,200 of the $6,000 IRA deduction claimed on the return (Stephen J. Dunn and Geri L. Dunn v. Commissioner, U.S. Tax Court, T.C. Memo 2015-208, Oct. 26, 2015).
This article was originally posted on December 1, 2015 and the information may no longer be current. For questions, please contact GRF CPAs & Advisors at email@example.com.