A client did an in-service withdraw in 2007. The pre-tax amount plus after-tax earnings were rolled over to an IRA. He received a 1099R with a code of G for this rollover. The after-tax amount was sent to him in a check which he subsequently used to establish a non-qualifed account. He received a 1099R with a code of 1 for this; however it states that the taxable amount is $0. His CPA prepared his 2007 return showing the full amount of the distribution (pre-tax + after-tax) on his 1040 (not sure which line) but put $0 where it asks the amount that is taxable. Now, the IRS is questionning the after-tax contributions saying in a letter to the client that it was reported but that because he was under 59 1/2 it is considered a premature distribution (which I guess is coming from the code 1). I know that there shouldn’t be any taxes or penalties on this as it was all after-tax contributions. Should the CPA have just included the pre-tax plus the earnings on the after-tax on the 1040? Was the code 1 appropriate in this case?