IRA rollover incorrectly reported on Form 1099

Submitted by Jerilynn Blackstone on Wed, 2014-06-18 17:02

My client inherited an IRA (approximately $31,000)from her mother. Instead of doing a plan-to-plan transfer, the exiting IRA custodian (after distributing to my client the RMD that had not been taken for the year by the mother) issued my client a check (net of approximately $7,000 withheld for federal and state tax).

My client set up an inherited IRA within several weeks of receiving the net check.

My client received 2 Forms 1099
#1. For the RMD, properly shown as taxable to her (distribution code 1)
#2. For the gross amount of the IRA distributed ($31,000) (distribution code 4)

Queries:

Since the inherited IRA that was established was for approximately $24,000, will the taxes withheld be treated as a taxable distribution in addition to the RMD?

What is the best documentation to present on the tax return to establish that $24,000 of this was rolled over and is, therefore, nontaxable?



Submitted by Alan - IRA critic on Wed, 2014-06-18 17:45

  • Whoa! Client has a large problem here because a DISTRIBUTION was done instead of a transfer. Once a distribution is made from a non spouse inherited IRA it cannot be rolled over in any circumstances. That means the inherited IRA she established must be distributed as it is an excess IRA contribution. It is very strange the new custodian even accepted a rollover contribution here, perhaps they confused this with the spousal rollover rules.
  • #1 1099R is also wrong – it was made to a beneficiary so the code should have been 4 (death distribution). There should just have been one 1099R with the combined total shown and coded 4. Client will now be taxed on the entire total distributed, but there should be no penalty. She can eliminate the penalty on the incorrect RMD amount by filing Form 5329 and showing death exception code 04 in the space provided next to line 2.
  • The distribution from the new inherited IRA will not be taxable except for any earnings, since the original distribution is being taxed. A explanation of what happened will have to be included on her tax return to prevent the IRS from thinking that the next distribution should also be taxed. That would be double taxation on the same money.
  • There obviously was a major slip up with respect to the distribution, perhaps in the paperwork returned. It is also strange that the custodian bothered to separate the RMD amount if they thought a lump sum distribution was being processed.
  • Perhaps check with the client again to be sure your facts are right here. Hopefully, they are wrong, but good thing the IRA was not much larger. Client could make the best of this by using the money to subsidize contributions to her own retirement plans if she is working or eligible for IRA contributions to her own IRA.

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