What CP22I and CP21I mean
Both notices say the IRS made changes to your return for the year shown, and the changes involve Individual Retirement Arrangement taxes. The IRS's notice lists describe CP22I as an IRA tax adjustment notice with a balance due. CP21I is the same kind of adjustment, but it can show a balance due, an even balance, or an overpayment.
IRA taxes are separate from regular income tax on the distribution itself. They are the extra taxes Congress attached to certain IRA mistakes: taking money out early, putting too much in, or failing to take money out on time.
Why you got it
The IRS compared your return with information it received, such as Forms 1099-R and 5498 from your IRA custodian, and decided the IRA-related taxes on your return were wrong or missing. IRS procedures note that IRA taxes are tracked on a separate module of your account, which is why these notices carry their own "I" suffix.
The notice explains the change. If it doesn't explain it clearly enough, the IRS says to call the toll-free number on the notice and ask what was changed and why.
The three IRA taxes behind most of these notices
Early distributions
IRC 72(t) adds a 10 percent additional tax on the taxable portion of a distribution from a qualified retirement plan, including an IRA, unless an exception applies. Age, disability, certain medical expenses, and several other exceptions are listed in the statute. If you took a distribution and your return claimed an exception the IRS does not see support for, or claimed none, a CP22I can follow.
The statute lists the exceptions. Among them are distributions made on or after age 59½, after the account holder's death, because of disability, or as part of a series of substantially equal periodic payments. The medical expense exception and others appear elsewhere in IRC 72(t)(2). If you relied on an exception, your Form 5329 should show it and your records should support it.
Excess contributions
IRC 4973 imposes a 6 percent tax on excess contributions to an IRA, figured as of the close of the year. The tax applies each year the excess stays in the account. Contributing more than the annual limit, or contributing when you were not eligible, can trigger it.
Missed required minimum distributions
IRC 4974 imposes a 25 percent tax on the amount by which a required minimum distribution exceeds what was actually distributed. The statute reduces that to 10 percent if you take the missed distribution and report the tax within the correction window. IRC 4974(d) also lets the IRS waive the tax if the shortfall was due to reasonable error and you are taking reasonable steps to fix it.
The IRA itself is rarely the problem. The paperwork around it usually is.
What to do now
- Read the explanation. Identify which IRA tax changed and by how much.
- Compare your records. Pull Forms 1099-R and 5498 for the year and the Form 5329 you filed, if any. Look at the distribution codes on the 1099-R. A wrong code from the custodian can create a tax you do not owe.
- If you agree and owe: pay by the date on the notice to avoid more interest and penalties. The IRS recommends paying online for timely receipt.
- If you cannot pay in full: make payment arrangements. The IRS says you can request a payment plan.
- If you disagree: call the number on the notice. Have your documents in front of you.
- Correct your copy of the return so your records match the IRS.
If the custodian made the mistake
Sometimes the 1099-R is wrong. The distribution code may say early distribution when an exception applied, or a rollover may be reported as a taxable distribution. Ask the custodian for a corrected form. Then give the IRS the corrected information when you call or respond. The corrected form is far more persuasive than your explanation alone.
Interest and penalties
The IRS says if you don't pay the full amount by the date on the notice, interest accrues on the unpaid balance after that date. You will also be charged a late payment penalty. If circumstances beyond your control prevent you from paying, the IRS says to contact it by the payment due date, and depending on your situation, it may be able to remove the penalty.
On a CP21I that results in a refund, the IRS says to expect it within 2 to 4 weeks of the notice date if you haven't received it already. Interest paid on a refund is taxable income in the year you receive it.
What not to do
Do not ignore a missed RMD. Taking the distribution and correcting the return within the correction window can cut the tax from 25 percent to 10 percent, and the waiver for reasonable error requires that you are fixing the shortfall.
Do not leave an excess contribution in the account. The 6 percent tax applies each year it remains.
Do not assume the IRS is right because the custodian's form agrees with it. The form may be the error.
Need another correction?
The IRS says that if you need to make another correction to your account, file Form 1040-X, Amended U.S. Individual Income Tax Return. Use it if the IRA change exposes other errors on the return, or if you are claiming an exception you left off.
The law behind CP22I and CP21I
IRC 72(t) imposes the 10 percent additional tax on early distributions. IRC 4973 imposes the 6 percent tax on excess contributions. IRC 4974 imposes the tax on missed required minimum distributions, reduced to 10 percent when corrected in time, with a waiver for reasonable error. IRM 3.14.1.6.22.1 describes how the IRS reviews IRA notices, including CP21I and CP22I.
If an IRA notice does not match what happened in your account, call us at (813) 229-7100.