Taxing Lessons Case Summaries

Case — Roth IRA Excess Contributions

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TL Case Summ


Can the IRS assess penalties for excess contributions to a Roth IRA without making a corresponding adjustment to the taxpayer’s income tax?


Taxpayer Says: It’s inconsistent for the IRS to treat the excess contributions differently for income tax purposes and excise tax purposes. The excise tax penalties should not be assessed.

Internal Revenue Service Says: The excess contributions fail the substance-over-form argument for both income tax and excise tax. Only the statute of limitations prohibits the assessment and collection of income tax deficiencies. There is no inconsistent treatment and the excise tax penalties should be allowed.


From Internal Revenue Code Section 4973: Imposes a six percent excise tax on excess contributions to IRAs. The tax applies each year until the excess contributions are eliminated from the taxpayer’s IRA.

From Hellweg v. Commissioner, T.C. Memo. 2011-58, 2011: The court rejected the IRS position that the transactions at issue were “valid for income tax purposes, [and] lack[] substance for excise tax purposes only.” The court concluded the taxpayers were not liable for excise tax under section 4973(a) because (1) that section compels consistent treatment of transactions for income tax and excise tax purposes, and (2) “the IRS position that * * * [the transactions at issue in Hellweg are] substantive for income tax purposes undermines his attempted use of the substance-over-form doctrine to recharacterize the transaction[s] for excise tax purposes.”

From Ohsman v. Commissioner, T.C. Memo. 2011-98, 2011: The court rejected the IRS position that the transactions at issue should be recharacterized for excise tax purposes only. The court concluded the taxpayers were not liable for excise tax under section 4973(a) because the IRS “neglected to challenge the substance of the * * * [transactions at issue in Ohsman] for income tax purposes.”


When you contribute more money to a Roth IRA than is allowed under the Internal Revenue Code, you’ll have to pay a 6% penalty on the excess until you remove it. In addition, you’re required to file Form 5329, Additional Taxes on Qualified Plans, for each year the excess contributions remain in your account.

The excise tax cannot be determined without taking your income tax into consideration. Since the two are entwined, a transaction must be treated consistently for both excise tax and income tax purposes.

In this case, the taxpayer used what’s now considered a “listed tax avoidance practice” to get around the limitations on Roth contributions. The transactions in question took place from 1998-2001, prior to the issuance of an IRS notice (Notice 2004-08) that challenged them on a substance-over-form basis.

The IRS did not become aware of the excess contributions until 2007, when conducting an audit of the taxpayer’s 2005 tax return. Because the statute of limitations had run on the years the excess contributions took place (and no fraud was asserted), the IRS did not make any income tax adjustments to those years.

However, because the taxpayer had not filed Forms 5329 as required to report the excess contributions and the excise taxes due, the statute of limitations did not apply for those returns. The IRS issued a notice assessing excise taxes, failure to file penalties, and failure to pay penalties for the years the excess contributions remained in the account (2002 through 2007).

The taxpayer says the excise taxes should not be assessed because the IRS made no income tax changes. The taxpayer argues that in two previous cases (see The Law section above), the tax court determined the IRS must treat transactions consistently for both income tax and excise tax.

The IRS says the treatment is consistent because both income tax and excise tax adjustments would have been made if the years in question had not been closed to income tax adjustments due to the statute of limitations.


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HL Carpenter, an experienced investor and a CPA, specializes in reader friendly articles on taxes and investing for individuals and small businesses, and publishes two newsletters: Taxing Lessons and Top Drawer Ink. Visit and

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Sorry, wrong answer :(
Right answer!
For the IRS. In contrast to the two prior cases, the IRS does not take inconsistent positions for income tax purposes and excise tax purposes with respect to the taxpayer’s transactions. For both purposes, the IRS believes that under the substance-over-form doctrine those transactions should be recharacterized. However, for income tax purposes the applicable respective periods of limitations for taxable years 1998 through 2001 during which the transactions had taken place had expired by the time the IRS learned of those transactions. The IRS did not seek to undertake the useless action of determining any income tax deficiencies for taxable years 1998 through 2001 resulting from the transactions that the IRS was prohibited by law from assessing and collecting. We conclude we should not reject the respective excise tax deficiencies under section 4973(a) that the IRS determined in the notices resulting from the transactions on the ground that the IRS did not determine respective income tax deficiencies of the taxpayers resulting from those transactions.