I'm in a dilemma that seems even too tough for the IRS to yield enough information on how to properly resolve (at least through their general 800 number). In 2005, I signed on to do work for a small company as a
1099 contractor. The company was just getting off the ground, had no office yet, and the work I did was very piecemeal. After 5 months, the company got funding and I was hired as a full-time employee. I was promised benefits and such, but the woman I worked for convinced me I'd do better by remaining a consultant since doing so, would allow me to claim lots of deductions, thus lowering my taxes. Put on the spot, I agreed, but quickly realized it was a foolish decision. (Foolish, because she lowered my rate to reflect being an employee, but didn't return it to the contractor rate after she backed me out as an employee.) I stayed because I thought things would improve financially as cashflow improved and didn't look forward to another job search, but when things grew worse, I left in 2006. Not at all happy with the way she "conned" me into the status change, since doing so actually left me with a greater tax liability (paying the self-employment FICA taxes), I decided to file an SS-8 with the IRS to get a determination on whether I was a common law employee. If they ruled in my favor, I thought I wouldn't have to pay the added FICA taxes on income earned from the point she had first made me an employee. I earned about $35k in compensation during the first five months as a contractor, so when I filed my taxes, I opted to put $6000 into a SEP- IRA. I filed using the extension in October, but according to the rules, SEP-IRAs could be funded to the filing deadline including extensions. Knowing my income was going to be drastically lower in 2006, I then converted this to a ROTH IRA. The SS-8 determination takes over six months to complete. They tell you to file using the conditions of your expected ruling. In December 2006, I got the ruling back. Instead of deeming me an employee from the point I was "hired" full-time, they ruled me an employee for all my work with this company. On the upside, I can file an amended return to get back the FICA I overpaid for compensation I filed under a 1099. On the downside, it leaves me in a quagmire on the retirement deduction. Here's what I'm trying to figure out:I know that at least $2000 is an excess contribution that needs to come out. Since I'm under 50, I'm only allowed a $4000 contribution to a regular IRA. But what about the $4000. I made it to a SEP-IRA, not a tradtional IRA. The IRS can go back in time and rule my circumstances to be different, but I can't go back in time and change them in a likewise fashion. Will I be able to maintain at least a $4000 deduction for TY2005? And if that's not confusing enough, how is the ROTH conversion handled? I'm guessing I'll have to pay the 6% excise tax on excess contributions-- which doesn't seem fair since it was the IRS who told me to act on the expected ruling. Since their ruling differed from what I expected, I'm now to get penalized for it? So at the moment, I basically have $6000 in a (converted) ROTH IRA. Ideally, I'd like to be able to take the $4000 IRA deduction for TY2005, pay back the taxes on the excess deduction ($2000) I took, then declare the $2000 be a ROTH contribution for TY2006 (I'm well within the income limits to do so). The distinction between a SEP-IRA and traditional IRA is the big confusing factor. My fear is that they are distinctly different, making it impossible to reclassify the SEP as a traditional, which means the entire contribution will need to be backed out and I'll be hit heavy with the taxes/excise penalties. I called Fidelity to ask for possible action to take. They wouldn't even begin to make a suggestion as to what to do, saying it was a tax matter and they don't give tax advice. So, basically I need to figure out what needs to be done, then give them instructions on how to make this kosher. Any advice would be appreciated.