A few years back, I opened a Traditional IRA with Fidelity Investments in what I thought was my spouse's name to make deductible contributions, since she is not employed. We have been contributing $6,000.00 per year to the IRA and deducting that amount on our joint 1040. Well, to my surprise, I got a letter from the IRS stating that the IRA was actually in my name, the contributions were not deductible, and that I owe them an additional $2K+ in back taxes with interest for tax year 2008!

Upon calling Fidelity, they verified that the account is indeed in my name, I had set it up incorrectly, and that there was nothing they could do about it. They said that because they have been reporting the contributions to the IRS via Form 5498 under my SSN, they couldn't switch it over to my wife's name.

What can I do at this point? Can the IRA be changed to my wife's name at this point? Do I owe the IRS these back taxes for 2008? We also made contributions (6K) to the account last year as well, and claimed it as a deduction on our 2009 taxes - are they going to make me pay that as well? Incidentally, I was unemployed for most of 2009 and was not eligible for any 401k plan; however I was eligible for (and contributed to) my employer's plan in 2008.

I have to respond to the IRS by the end of this month, so any help would be appreciated!!