I have lived overseas since 2001, and because of that status, claimed the foreign income exemption status on my annual tax returns. All the while I was making contributions to my Roth IRA, and my wife's Spousal IRA. I was recently told that those contributions are not allowed, since because of claiming the foreign income exemption I had no taxable income during those years. Now I am trying to straighten our the problem. I have called the mutual fund companies where the IRA accounts are located (not the original companies, since I moved the IRA's from Schwab to other investment funds), and was told that they could not help me so I would need to talk with my tax preparer. I have no idea what I need to do or where to begin fixing this problem. I assume I will have to remove all those contributions that I have made over the past 12 years from those IRA funds, and pay a 6% tax on the contrubutions for each year the money remained in the funds (is all this correct?). I am also wondering if I need to remove any income earned by those funds, and if so, would that be just for the year the money was invested, or all subsequent years as well? Since the funds have been moved to numerous funds over the years, I have no idea or records of what the earnings were each year. Can anyone please give me a step-by-step plan for how to fix this situation?

Just to clarify something on my original post: I am a U.S. citizen, now living in the U.S. While living overseas I was employed by a U.S. company.

I guess before talking to yor tax preparer, Needless to say, what you need to do is contact your R-IRA custodian. This is generally the bank, brokerage, mutual fund company or other financial institution you receive your R-IRA statement form. You can find their contact information on your statement, which generally arrives in your mailbox quarterly. In some cases, you might need to contact your investment adviser to get the ball rolling.You need to tell your custodian that you would like to remove non-qualified contributions you made to your R-IRA. If you are removing money from a Roth IRA, there are generally no tax considerations since the IRS already taxed the money you originally invested. If you are removing a traditional IRA contribution, however, you must make sure that you report that money as income when you file your taxes and not take a tax deduction for the amount. In both cases, you need to pay regular income tax and a 10-percent tax penalty on any earnings generated by the original contribution., Your custodian will figure out how much money in earnings, if any, you have to claim as taxable income or etc. Then, you need to contact a CPA/ an IRS EA for professional help on your returns, federal/state(as long as you are a full year resident of the state).