The calculation works the same way for SEP IRAs. Your basis is still the total of your non-deductible contributions. The difference is that most SEP IRA contributions are made by employers and are always pre-tax, so they don't create basis. If you made additional non-deductible contributions to your SEP IRA (uncommon but possible), only those would count toward your basis. Most people with only employer-funded SEP IRAs have a basis of $0, meaning the full conversion is taxable.

Thanks for clearing that up! My SEP was entirely funded through my self-employment business, and I always took the deduction for those contributions. Sounds like my basis really is $0 then, which explains why TurboTax is calculating tax on the full conversion amount.

Oh no, this sounds complicated! I do have another traditional IRA that I didn't convert. Does this mean I need to include that one in my calculations too? My tax software didn't ask about my other accounts at all!

Yes, you absolutely need to include your other Traditional IRA in the calculation! This is a common mistake that many tax software programs don't properly warn you about. When you complete Form 8606, you'll need to report the December 31st fair market value of ALL your IRA accounts (traditional, SEP, and SIMPLE) on line 6, not just the one you converted. This changes the pro-rata calculation of how much of your conversion is taxable. Definitely go back and check this in your tax software - there should be a place to enter the total value of all your IRAs, even the ones you didn't touch for the conversion.

Yikes, I'm so sorry you went through that! Thanks for the warning - this is exactly the kind of situation I'm trying to avoid. I'm definitely going to verify active licensure before moving forward. Did you end up finding a legitimate CPA after that experience?

Yes, we eventually found a great CPA through my coworker who's been using him for years. The difference was night and day - our new CPA provided all his credentials upfront without being asked and even showed us his professional liability insurance certificate. One tip: when we interviewed him, he asked US detailed questions about our situation rather than making generic promises about maximizing refunds. That level of detailed interest was a good sign he actually knew what he was doing. He also explained exactly why the previous deductions were improper and helped us file amendments. Good luck with your search!

This is a really good point. Government websites are notoriously outdated sometimes. I'd definitely ask them about it - their response will tell you a lot about how they handle client concerns.

I thought about that but was trying to save money since my income is already pretty tight. Do you think it's worth the cost even if my situation isn't super complicated? Did they find any deductions you missed or was it just for the reassurance?

Yes, I think it's worth the cost even for a relatively straightforward situation, especially in your first year or two of self-employment. The CPA actually found several deductions I had missed - part of my phone bill, a portion of my internet, some office supplies I'd forgotten about. These additional deductions saved me around $400 in taxes, so the service more than paid for itself. The peace of mind was the biggest value though. Having a professional review everything and say "this looks correct" eliminated so much anxiety. They also gave me a simple system for tracking everything this year, which has made the whole process much easier. If money is tight, you might look into VITA (Volunteer Income Tax Assistance) which offers free tax help for people who make under $60,000.

This is a good point. The IRS isn't suspicious of people who happen to be in the EIC range - they're looking for people who make up fake income or dependents. Lots of legitimate self-employed people naturally fall into this income range.

That's a really good point about keeping all the documentation. Should I also be sending the payment by certified mail or some other trackable method? And do I need to include a copy of the latest CP2000 with my payment?

Absolutely send your payment via certified mail with return receipt requested. That gives you proof of exactly when you sent it and when they received it. I would recommend including a copy of the payment voucher from the CP2000 (not the entire notice), along with a brief letter stating that this payment is for the agreed amount on your CP2000 dated [specific date] for tax year 2019. Include your Social Security number, the notice number, and any other reference numbers on the CP2000. Better to include too much identifying information than not enough.

Totally agree about the IRS departments not communicating. I work at an accounting firm and we see this constantly. The examination department will agree to one thing while the collections department is still pursuing the original amount. For the OP, you might check if your local Low Income Taxpayer Clinic (LITC) can help. If you qualify based on income, they provide free representation.

Wouldn't selling trigger that punitive tax rate the first poster mentioned though? Wouldn't that be worse than just dealing with the annual reporting?

Yes, selling will trigger the tax event at potentially the highest rate plus interest charges if you're using the default PFIC method. However, it's a one-time pain versus ongoing compliance costs and headaches. If you can make a QEF election for the current year before selling, that might reduce the tax impact somewhat. Or if you've only held them for a short time, the interest charges might not be too severe. I did the math and realized that even with the higher tax rate on selling, the amount I'd save in accounting fees over the next decade made it worthwhile to just take the hit and simplify my life.

I use MTM for my Australian ETFs. You can only make the election on a timely filed return for the year, and once you make it, you're stuck with it. The upside is you report gains/losses annually as ordinary income (no special PFIC tax rates). The downside is you can't claim losses beyond your gains from other MTM PFICs. It's way less complicated than the default method though.