My ex-wife just received a letter from the IRS stating that they were recommending changes to her 2011 return. The issue is a cash pay out from a college savings plan that was invested in a mutual fund. It was completely funded by after tax dollars from her checking account.

When her taxes were prepared last year, we had no 1099-Div from the fund company and since she had always refered to it as a savings account, I didn't think to question it. The IRS recommended changes to her return that would make her liable for taxes on the entire amount...including her deposits.

The account was funded with $50 transfers from checking over 15 years totaling $9K. The amount on the IRS letter is 10.5K. The amount they are charging in taxes is 15.75% of the full 10.5K.

The letter also states that if she doesn't agree with the proposed changes, we can supply the supporting documentaion to get a reversal....I'm thinking the 1099-Div showing the amount of gains that she actually received. They stated they received a 1099-B. Wouldn't this form show the gains vs contributions?

Can somene tell me if we're on the right track here?

Thanks in advance.

Mark