1099-R and 5498

Submitted by Todd Martin on Sat, 2017-08-05 01:44

This has to do with a situation that happened in 2012 with a client that was 61 at that time. Client was attempting to do a direct IRA rollover from one of his financial institutions to another. When he called the vendor that he was transferring the proceeds from, they completed an IRA distribution request for him over the phone and sent the document to him for his signature. The client, assuming the vendor had the document correct, signed and returned it without question. There is a box on the form that says “normal” distribution and the “direct rollover” box was not checked. However, the vendor had the “federal fund wire” box checked with the name, account number, etc. of the receiving firm although there is no mention of “IRA” in the wiring instructions. The receiving firm received the funds and deposited them in his existing IRA.

The client then received a 1099-R for the 2012 tax year. The transferring firm shows the amount, both boxes in 2b are checked, and the distribution code in box 7 is a “7” – normal distribution. He did not review the 1099-R and provided it to his accountant to file his income taxes. His accountant, not realizing the error, had the client pay over $15,000 in federal income taxes plus state to accommodate the distribution since no federal or state income taxes were withheld. To compound the problem, the receiving firm applied the funds as an “IRA transfer” and not as a “2012 IRS Form 5498 rollover contribution”. Therefore, there is no mention of the transfer on the 5498.

In 2016, the client received a notice from the IRS stating there was a problem with his 2012 income taxes involving the distribution and that more taxes were needed. He provided the document to his new CPA, who did some research and discovered the error that occurred in 2012. The client went back to the transferring vendor first. Despite the fact that their employee completed the document incorrectly, they were unwilling to help him or take any responsibility for the error. He then reached out to the receiving firm. In November 2016, the receiving company provided him a letter acknowledging their error in coding the contribution incorrectly, stated they could not go back and amend his 2012 5498, but provided him a letter for his new CPA to file an amended return to attempt to get the tax revenue accidently paid returned.

In July 2017, the IRS responded to the amended return, stating “we could not allow your claim” due to the 3 year rule and him just now filing the amendment. Is there anything that anyone can think of that can be done to either: 1. Get the client the taxes that he paid back 2. Be able to rollover this money in an Roth IRA or any other techniques to help soften the sting of the situation and what has transpired? 3. Can he move the proceeds of the “after tax” money into a new IRA and then when his RMDs begin, take them from his “after tax” account since he already paid tax on the contributions?

The client is now 66 and will start taking RMDs in another 4 years. I appreciate your input and thoughts.



Submitted by David Mertz on Sat, 2017-08-05 12:11

  1. It seems possible to get the 2016 additional assessment abated or, if paid, refunded, but the taxes paid with the original timely-filed 2012 tax return cannot be refunded since the statute of limitations for a refund of that portion has expired.
  2. A Roth conversion would be a taxable transaction.  Whether or not a Roth conversion would be beneficial to the client has nothing to do with the past events.
  3. The failure on the 2012 tax return to properly exclude this amount from income does not create after-tax basis in the client’s traditional IRAs.
  4. If the notice of additional assessment was provided to the CPA within a timeframe that would have allowed the CPA to file the amendment or to file a protective claim for refund (although I’m not sure that a protective claim for refund would apply in this case since the amount was actually known) before the 3-year statute of limitations expired, the CPA may have some liability for not doing so.

Submitted by Alan - IRA critic on Sat, 2017-08-05 16:15

  • It is not clear to me what generated the 2016 IRS Notice or what it addressed. It sounds like original CPA was not told about the rollover or transfer and reported the 1099R as income, so why did the IRS issue that Notice and why would more taxes be needed?  Was it received prior to 4/15/2016?  If so, perhaps this Notice might result in an extension of the SOL to file the claim for refund, so this should be investigated.
  • Not sure how the client facing a 15k tax due bill with the original return, and knowing this sizeable distribution was either transferred or rolled over would not take some action then. Most such problems can be worked out if they are addressed promptly, otherwise deadlines pass and involved parties are reluctant to even look into aged issues.

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