My 66 yo brother got a penalty letter from the IRS saying he owes them over $25K for taking a taxable distribution from his 401K (which ended up in his IRA) 2 or 3 years ago. He’s panicked - I don’t THINK (but will re-confirm) he let the money ever get into a bank account in the middle, it was all a direct rollover.
- he doesn’t have/can’t find the documentation (1099-Rs) for the distributions.
- in that year, he left employer A with their 401k plan and became a 1099 EE for employer B.
- somewhere in/around that transition, employer A terminated their relationship with Provider A and transferred the funds and management to Provider B.
- My brother had the balance transferred as a distribution to his existing IRA with Provider C.
- Apparently Provider A is claiming they have no records around that transfer remaining. Not sure what Provider B is going to turn up. Provider C just says “we have the deposit record”.
- Somewhere in those transactions it was treated as “taxable” instead of a rollover, and so the IRS wants its due per the rules.
- His accountant (the guy that apparently did his taxes that year) is not helpful.
Does AJ or anyone else have any good ideas about how he can unscrew this situation? Should he consult a tax lawyer? Meet with the IRS with or without documentation? Spend 800 hours on the phone with Provider A and B until they turn up something?
Any guidance appreciated.
Any distribution from a retirement plan should be documented with a 1099-R from the administrator who facilitated the distribution. Reading between the lines, it seems like that’s probably Provider B. I will point out that if he was signed up for electronic receipt of documents from Provider B, he may not have gotten the 1099-R in the mail, but probably would have gotten a notification that he needed to go online to get a copy of the 1099-R. That said, if Provider B only had his e-mail address from his previous employment, he may never have gotten the electronic message notifying him that the 1099-R was available.
Your brother needs to confirm how the money got to Provider C. You don’t think, but don’t know for sure if a check went to your brother, which he cashed, and then sent into the IRA? And if that happened, how long did it take to get the money to Provider C, and did your brother account for any withholding distribution when he made the deposit to the IRA? And had your brother done any other rollovers into his IRA in the prior 365 days? Those are all important details, because there could be tax consequences depending on the answers.
Other options for the money being transferred: Did it go through your brother as a check made out to Provider C that was then sent to Provider C by your brother? And was that sent within 60 days? Or did it go directly from Provider B to Provider C, without your brother touching the money?
In addition to asking Provider B about a 1099-R, your brother may want to look at account statements from Provider B to see if he can discern whether the money was sent to him or to the IRA.
Since your brother doesn’t seem to have a 1099-R, I’m guessing that your brother probably didn’t provide one to the accountant. The accountant really can’t help him until he gets a 1099-R. Once he gets a 1099-R from your brother, he should be able to help your brother figure out what needs to be done, which will likely be filing an amended return.
@FlyingCircus I would start by having (or helping) your brother set up an account with the IRS. That will take a couple of weeks, since it involves a snail mail step.
With that, he can obtain a transcript of both his tax return and all of the documents third parties have sent to the IRS. That will include the all-important 1099-Rs, which seem to be the issue here. It should also include Form 5498 from the IRA custodian. That form reports the receipt of the rollover.
Hopefully, he also has a copy of the tax return in question.
With that information in hand, compare the 1099-Rs to what is on the tax return and on the tax return transcript. A common error in this situation is to think that because the rollover isn’t taxable, you don’t have to report it at all. But it does need to be reported.
On the appropriate line for retirement plan and IRA distributions, there are two entries. One is the total distributions, the other is the taxable portion. With a rollover, the correct reporting is to include the distribution as part of the total and leave it out of the taxable portion. Also write “rollover” on the line.
If he didn’t do all of that, a letter as you describe would be the expected response from the IRS. The fix would be to write to the IRS and explain what happened. Include a copy of the 1099R and the 5498, along with any other supporting documentation you can find - perhaps the account statement from the IRA for the month of the rollover showing the deposit of the funds.
AJ, thank you so much for the excellent guidance. I will try to walk him through this soon with your input on research next steps.
Same comment Peter - the IRS account is an excellent idea. I will try to walk him through this soon with your input on research next steps.
I had occasion to do this several years ago (so the rules may well have changed) regarding a mutual fund I didn’t know I had because my parents had set it up for me to save for college and forgot to tell me about it. In those days, there was a deadline to respond to the IRS’ letter, but an extension was virtually automatic if asked for, so the needed research could be done. I wrote, asked, and got the extension.
FC–FC’s brother–might ask for the extension, if it’s still in the rules.