Deductibility of IRA contribution

[Lion]

Tell him if it's simple, then TurboTax can do it for him!

[FEDUKE404]

The ordeal continues

Tell him if it's simple, then TurboTax can do it for him!

FWIW, TurboTax is actually QUITE good at handling K-1 information, if (and only if!) each and every bit of information on said K-1s in entered correctly by the taxpayer.

From the most recent posts, it appears this fellow is not only lost in space as to the definition of "return of capital" but he also is clueless in Seattle on the definition of "passive income" --- which is also an issue that would have been handled by proper original entry of the K-1 data. (Addendum: If any of the K-1s show an entry as a "Publicly Traded Partnership" then I strongly suggest you just call in the Marines to visit this guy.)

Oh yes: The fact that *HIS* SSN is on the K-1s pretty well closes the door on the "incorrect" IRA deposits issue, n'est-ce pas?

Keep those billable hours rollin' .

FE

[manyhappyreturns]

more info and a question

I met with my client and he is a lot nicer in person than on the phone, so that's good. He is still sticking to his idea that he doesn't owe the tax that the IRS says he owes, but at least he believes me now that I am not the one authorized to waive his tax liability. He is going to try to get some kind of documentation from his investment company to prove his case. What he kept saying is that the $4,467 that Fidelity Investments supposedly deposited in his IRA went into what he called his "cash account" aka "core account" and that his entire cash (or core) account was included in the distribution, so he shouldn't have to pay tax on that $4,467 because he is having to pay tax on it as K-1 income already. Does anybody know what the terms cash account or core account even mean? I told him that the IRS at least thinks of it in terms of the total amount in the account and doesn't break it down other than separating out the cost basis amount to be distributed tax-free over time.

[FEDUKE404]

This matter should be a done deed!

I met with my client and he is a lot nicer in person than on the phone, so that's good. He is still sticking to his idea that he doesn't owe the tax that the IRS says he owes, but at least he believes me now that I am not the one authorized to waive his tax liability. He is going to try to get some kind of documentation from his investment company to prove his case. What he kept saying is that the $4,467 that Fidelity Investments supposedly deposited in his IRA went into what he called his "cash account" aka "core account" and that his entire cash (or core) account was included in the distribution, so he shouldn't have to pay tax on that $4,467 because he is having to pay tax on it as K-1 income already. Does anybody know what the terms cash account or core account even mean? I told him that the IRS at least thinks of it in terms of the total amount in the account and doesn't break it down other than separating out the cost basis amount to be distributed tax-free over time.

Sounds to me like he had some income distributions from his various K-1s. The funds apparently never went into an IRA account (how could they?!?) and instead went into his general cash account. Most investment accounts have such, and income from dividends, stock sales, funds transfers, or whatever go there. Just think of it as an internal "bank account." In reality, many such accounts even allow check-writing privileges to use the funds generated from the taxable investments (but obviously not from any IRA accounts!). The account will pay a token amount of (taxable) interest on the funds there.

I still am intrigued that anyone can be talking about "waiving" liability on what is likely taxable income. Until you see all of the K-1s, and review his Schedules B and E (which is where most of the PTS income should have landed) such talk is very premature. And I would demand to see a copy of his previously filed tax return! As a tax professional, you do not want to risk your own integrity by relying on his "explanations."

If you care to pursue this, ask to see his annual/quarterly investment account summary (differs completely from any tax documents). It is quite likely you will see several accounts, one of those being the IRA account. Look for the cash distributions (quarterly and/or annual) from the K-1s. Just because the cash distributions from the K-1s appear on that document does NOT mean the funds went into the IRA account!

Also it appears the guy is still confusing distributions with dispositions. What he PAID for the K-1 stuff (whether MLP or PTP or whatever) is irrelevant until such time as he disposes of the asset. The "cost basis" or (alleged) "return of capital" becomes relevant ONLY upon disposition of the asset represented by the K-1. Otherwise, the annual K-1 alone determines what is required to show up on his tax return. And, as I mentioned earlier, if the K-1s represent PTPs or MLPs, you could be in a world of hurt based upon what else is on the overall tax return. The "simple" K-1 stuff can end up on Schedule B, but what shows up on Schedule E and/or Form 8582 can be challenging, especially when dealing with a "confused" client.

Don't know how I can make this issue much clearer. Feel free to PM or perhaps even send sanitized documents for me to review.

Even if the guy is "nice" he still can be quite wrong in his interpretation of things. . . .

FE

[manyhappyreturns]

Just as a clarification, I was not saying I would consider granting any waivers. I told TP if I was going to do his amended return, I would need to use the info from the 1099s, 5498s and K-1s he presented, because that's the info the IRS has. I told him if he wanted to try getting corrected documents from his investment company, then go for it. He did that, but they told him no, and now they are telling him he needs to complete a form 990-T. I'm totally unfamiliar with this form, because I don't do business returns -- just individuals including sole proprietorships. The 990-T is for an exempt organization business return, and I don't see how this applies to his situation at all, and he doesn't either. Any thoughts on this? Thanks!

[jimfrombx]

990-T S/b filed by Custodian

If the broker is telling him to file the 990-t than the K1 was most likely credited to his IRA. If you make over $1,000 in an IRA from UBIT (unrelated business income tax) the BROKER is required to file the 990-t. If you look at the KI it should have the broker's Ein number and NOT your clients social security on it, and that is why THEY are required to file the 990-T. I hear that TD Ameritrade and maybe a few others, tell clients to fill out the form and send it to them when you are finished, as they are required to file. Schwab supposedly handles these quite well as they have quite a few clients who hold MLP's in their IRA's. If that is the case notify the IRS, that should take care of your clients issue, however it then becomes his custodian IRA issue.
Investortvillage.com has an MLP board that has extensive discusions on this.

[manyhappyreturns]

The broker's EIN is not on any of the K-1s. They are all showing the TP and his SSN on them as recipient. This is all new territory for me, as I'm fairly new in the business and just do individual tax returns. I'll check out that website and see if I can learn anything. I'm sure this won't be the only one of these I ever get. Thanks for the info.

[Burke]

. I told him if he wanted to try getting corrected documents from his investment company, then go for it. He did that, but they told him no, and now they are telling him he needs to complete a form 990-T. Thanks!

I think his investment company is totally nuts. Looks like the IRS has it right. It's unreported income from non-IRA partnership K-1's and he is going to have to deal with it. Whether he included part of that income on his return within the $64K he reported should be easy to determine. How did he come up with that figure? From your OP it appears he had a 1099-R for this amount. The two items are mutually exclusive. Whether Fidelity put it in his IRA is another matter.

[FEDUKE404]

Cutting to the chase

I think his investment company is totally nuts. Looks like the IRS has it right. It's unreported income from non-IRA partnership K-1's and he is going to have to deal with it. Whether he included part of that income on his return within the $64K he reported should be easy to determine. How did he come up with that figure? From your OP it appears he had a 1099-R for this amount. The two items are mutually exclusive. Whether Fidelity put it in his IRA is another matter.

My guess is an investment firm like the aforementioned Fidelity firm likely has their act together....it is the client who, in all probability, has a few loose kernels.

GET THE DOGGONE FIDELITY 2011 ANNUAL SUMMARY ACCOUNT STATEMENT, AND REVIEW IT CAREFULLY!!

There are only two possibilities:

1) Fidelity somehow screwed up and placed "personal" investment income funds into an IRA custodian account. That is not very likely. But if such occurred, it is not a "tax" issue but an administrative issue for Fidelity to reconcile, to include payment of interest/penalties/(tax?) for the client.

or

2) The "personal" funds were automatically placed, upon receipt from the partnership(s), into the Fidelity general cash ("bank") area for the client's non-IRA account(s). Income from the K-1s would NOT appear in any way on the Fidelity Form 1099 info....to report such income you have to work from the K-1s! You would need to look for quarterly/annual "deposits" from "XYZ Investment Partners" or something similar. This is the likely case, and your client needs to man up a bit, pay the taxes, and not put so much reliance in Turbotax.

And you should also keep that billable hours total in a forward position. . . .

FE

[FEDUKE404]

Type of return

The broker's EIN is not on any of the K-1s. They are all showing the TP and his SSN on them as recipient. This is all new territory for me, as I'm fairly new in the business and just do individual tax returns. I'll check out that website and see if I can learn anything. I'm sure this won't be the only one of these I ever get. Thanks for the info.

This would appear to me to be an individual tax return....

The return itself (absent facts not related) does not seem that complicated (caveat: if you need to deal with passive losses and MLPs/PTPs that can change quickly!) but rather the inability of the client to either be forthcoming with you or to provide you with the necessary required information.

In the simplest of terms, it appears the client has some investments, perhaps via means of a $hifty account manager, that were made on his behalf and he is not quite aware of the way such investments (via Schs K-1) operate. Running everything through Turbotax (GIGO) likely was not the wisest move in such a situation.

FE

[manyhappyreturns]

This is all making a little more sense as I read all the comments here, but the big thing I can't understand is why my client is being told by Fidelity to fill out a 990-T form. This is NOT a business tax return, and the K-1s he received are all in his own name and SSN. I am not familiar with Form 990-T, but it's quite clear that it is for a business entity, so I don't see the relevance at all to his situation.

I'm hesitant to spend much more time on this, because in the past I've found that TurboTax users think they should get their taxes prepared by a professional for about the same price they paid to file it themselves. They don't understand the "get what you pay for" concept. If I need to meet with him again to get Fidelity's annual summary of his account and search for deposits from the 7 different companies that sent K-1s to see where that money he is being taxed on really went, then he will have to understand that I charge more than Turbo Tax, and because this is getting so time-consuming, it will be WAY more than Turbo Tax.

Back to the main question I have now: What does the Form 990-T have to do with this situation? I mean, the first line is "Name of organization" and he is not an organization.

[JohnH]

Aren't you well past the "free consultation" and into billable time with this guy?
If not, you should be BEFORE any more conversations with him.
The only discussion you need to have with him right now is the amount of his retainer.

[Lion]

The 990-T organization would be his tax-deferred IRA (Forms 990 are for essentially tax-exempt organizations with the T for unrelated income). The name would be something like Fidelity Investments IRA Custodian for Joe Blow's traditional IRA. There would be an EIN on the K-1. Now, the broker could be using Joe Blow's name and SSN, but the partnership issuing the K-1 would not be. You need to follow the money. Who paid distributions that are reported on K-1s? Who were the checks written out to? Where were they deposited? If into an IRA, were they reported by your client as deductible or non-deductible contributions? Did he have earned income and qualify to make contributions? Time to get a hefty retainer and give him a list of documents you require.

[manyhappyreturns]

Yes, we are beyond the free consultation, and now that I have this new info about the 990-T, we might be able to get this thing solved soon. This is all new territory for me. I'm going to tell him that my original estimate of fees based on his "simple amended return" is way different from what this is going to cost him for me to get it all done correctly. There are 7 K-1s, all from different companies, and they are in the client's name and SSN.

You have all been so helpful, and I'm grateful for this board and all of you as well. Thanks!

Linda