Why audits focus on rollovers

During an audit the IRS compares reported distributions on Form 1099‑R with rollovers shown on Form 5498 and the taxpayer’s return. Discrepancies—missing trustee‑to‑trustee transfer confirmations, a missed 60‑day redeposit, or incorrect withholding—are common triggers. The IRS wants to verify whether a distribution was properly rolled over or should be taxed and possibly penalized (including early‑distribution penalties).

Key rules the IRS uses (short list)

  • Direct rollover (trustee‑to‑trustee): funds sent directly between plan custodians. Treated as nontaxable when done correctly (IRS rollover basics) (see: https://www.irs.gov/retirement-plans/plan-participant-employee/rollover-basics).
  • Indirect rollover (60‑day rule): cash or check paid to the account owner. The owner has 60 days to redeposit the full amount into a qualifying retirement account, or the distribution becomes taxable (and may be subject to the 10% early‑distribution penalty if under age 59½) (IRS Pub. 590‑A and 590‑B).
  • Mandatory withholding: eligible rollover distributions from employer plans are subject to 20% federal income tax withholding if not directly rolled over. If you complete an indirect rollover for the full amount, you must replace withheld tax from other funds to avoid tax on the withheld portion.
  • One‑rollover‑per‑12‑month rule for IRAs: indirect rollovers between IRAs are limited to one per 12‑month period for the IRA owner (trustee‑to‑trustee transfers aren’t restricted) (IRS guidance in Pub. 590‑A).
  • Roth conversions: rollovers to a Roth are taxable as conversions; the IRS will verify that the correct amount was included in income and any tax was paid.

Documentation the IRS expects

Keep these records for at least four years (and longer if your situation warrants):

  • Form 1099‑R(s) showing distributions from the old account.
  • Form 5498(s) that shows rollovers or IRA contributions received by the new custodian.
  • Trustee‑to‑trustee transfer confirmations or plan statements that show the funds never passed through your hands.
  • Bank deposits, canceled checks, or wire confirmations if you used an indirect rollover and redeposited within 60 days.
  • Correspondence with plan administrators and any withholding statements.

How audits commonly play out (practical examples)

  • Missed 60‑day window: The taxpayer received a distribution via check and redeposited after 60 days. The IRS treated the amount as a taxable distribution and assessed income tax plus the 10% penalty if under 59½.
  • Withholding not replaced: A 20% withholding on an indirect rollover wasn’t replaced when the taxpayer completed the rollover. The withheld portion remained taxable unless the taxpayer repaid it from other sources.
  • Form mismatches: Form 1099‑R reported a distribution but the taxpayer’s Form 5498 for the receiving IRA showed no rollover. The IRS adjusted income and requested proof of a timely redeposit.

What to do before and during an audit

  • Prefer direct rollovers. Trustee‑to‑trustee transfers avoid withholding and the 60‑day deadline. In my practice, recommending direct transfers prevents most rollover audit issues.
  • Reconcile forms early. When you receive Form 1099‑R and Form 5498, confirm the amounts match the rollover(s) you made. Contact custodians immediately if they don’t.
  • Build a folder. Keep the 1099‑R, 5498, transfer confirmations, bank records, and an explanatory note summarizing the transaction timeline.
  • If you miss the 60‑day rule, ask about relief. The IRS may waive the 60‑day requirement in certain circumstances (reasonable cause or specific hardship) under IRS guidance and revenue procedures; submission is case‑by‑case (see IRS rollover basics).
  • Work with a tax pro. If audited, a CPA or tax attorney experienced with retirement plans can prepare documentation and correspondence for the IRS.

Common audit triggers to avoid

  • Using indirect rollovers habitually (especially multiple IRA indirect rollovers within 12 months).
  • Failing to replace withheld federal tax when completing an indirect rollover.
  • Reporting a conversion to Roth incorrectly—forgetting to include the taxable conversion amount on the return.

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Professional disclaimer

This article is educational and reflects best practices current to 2025. It does not replace personalized tax or legal advice. If you face an audit or complex rollover, consult a qualified tax professional or attorney familiar with retirement‑plan audits.