The taxpayers in the case of Wu v. United States, 118 AFTR 2d ¶2016-5154, CA 7 the taxpayers recognized they had made an error and made excess contributions to their IRAs in 2007, failed to grasp the error of their position for a number of years, and then withdrew the excess funds and earnings in 2010.  The taxpayers recognized that they owed an excess contribution tax of 6% (IRC §4973) for each year there remained an excess contribution.

But what they disputed was whether that excess contributions tax of 6% should apply to 2009 since they had withdrawn the funds by the unextended due date of their 2009 income tax return.  IRC §4973(b) provides that “any contribution which is distributed from the individual retirement account or the individual retirement annuity in a distribution to which section 408(d)(4) applies shall be treated as an amount not contributed.”

Image Copyright yayayoy / 123RF Stock Photo

In IRS Information Letter 2015-0026 a taxpayer discovered that sometimes when the IRS changes its mind in what appears to be a taxpayer favorable fashion, taking advantage of that relief may introduce its own complications, in this case triggering the excess contributions tax of IRC §4973.

In this case the taxpayer had received Medicare waiver payments as a caregiver.  In Notice 2014-7 the IRS had determined that such payments were excludable from income and allowed taxpayers to amend their returns to take advantage of this change in position.