skip to Main Content

Two Important IRS Issues You Need to Know About

To All Clients: Two Important IRS Issues You Need to Know About 

Form 5498
At this time of year, I get lots of clients sending me an official-looking tax form called Form 5498. On it, you will see IRA contributions, market values, rollovers, and required minimum distributions. Many clients are confused that the form came in May or even June, and some are angry. You should be neither angry nor confused when you learn the purpose of Form 5498: it is provided for informative purposes only. In the 1980s, a law was passed stating that anytime a financial institution shares information with the IRS, it must also be sent to the taxpayer. Prior to this law, the IRS could gather information from a bank or broker and then use it against the taxpayer without even knowing what was shared. So why does the IRS require Form 5498 be sent to them by a bank or brokerage? The purpose is to audit the validity of a taxpayer’s retirement accounts according to the law. For example, Roth IRA contributions require earned income and adjusted gross income under $125,000 single or $198,000 married. The tax preparer may tell you if you are eligible to contribute to a Roth IRA, but nothing is stopping an unscrupulous taxpayer from contributing since the Roth financial custodian does not know your adjusted gross income. Form 5498 is the offensive move by the IRS to stop abuse of the retirement plan tax laws. Every year, the IRS takes the data from Form 5498 and enters it into their audit system. The program then does extensive forensic accounting of taxpayer returns using the tax ID numbers from Form 5498. Any assumed violation is immediately sent by the computer software to the taxpayer demanding compliance. In summary, Form 5498 is necessary for the IRS to audit retirement plan compliance and you receive Form 5498 only for informational purposes. Therefore, when Form 5498 comes in the mail, there is no need for confusion or anger, or to inform The Consulate.

Letters from the IRS
It is common, especially in today’s world of IRS automated compliance systems, to receive a letter from the IRS requesting money, information, or verification. It is also common for the client to view the IRS’s request as simple and easily resolved through a call to the IRS. However, your first call should be to The Consulate for any letter from the IRS, regardless of whether you did the return with Turbo Tax, used another accountant, or had The Consulate complete the return. Whether you call us or not, and whether we help with the situation or not, the cost of our service is the same. Therefore, it is wise to call us first when you receive any IRS letter in order to receive our insight before proceeding. Additionally, as CPAs, we have a special contact number with the IRS that can get through when calling (what used to be five minutes is now 30 minutes or more). Most general IRS numbers have a constant message playing all day stating that they are overwhelmed with calls and to try again later, which should be an embarrassment worth fixing. Please call The Consulate first regarding any letters from the IRS. With our insight, we can develop the most efficient response and determine who should handle it.

Financial Consulate aims to help lessen the worry and burden of wealth management and enhance financial wellness so our clients can pursue relationships and true fulfillment. Choose the professionals at Financial Consulate as your Certified Financial Planners™ (CFP®) to take advantage of our educational, ethical approach to financial planning. Our services are comprehensive, including tax planning, investment planning, retirement planning, estate planning, and more. We operate completely independently and offer fee-only services to keep your vision in line with our recommendations at all times. While we have offices in Hunt Valley, Maryland, Fernandina Beach, Florida, and Gettysburg, Pennsylvania, we serve clients across the nation. To begin your partnership with a trustworthy wealth advisor, please contact Financial Consulate today.

Back To Top