Erroneous 1099-Rs

Submitted by Bill Wright on Fri, 2018-03-02 17:43

Employer plan issued 1099-Rs with wrong after-tax basis information for distributions in 2016. Based on the incorrect Form 1099-Rs, employees rolled over the wrong amounts to their Traditional IRAs and Roth IRAs, respectively. In some cases, the after-tax basis was overstated; in other cases it was understated. Plan has now issued corrected Form 1099-Rs.

Can the “erroneous information” exception to the general rules in Code section 408(d)(5)(B) serve as the basis for getting the proper amount of money in the IRAs and Roths both for employees with overstated basis and understated basis on the original Form 1099-Rs?



Submitted by Alan - IRA critic on Fri, 2018-03-02 19:40

  • No. 408(d)(5)(B) only addresses the removal of excess contributions to IRAs and there is no excess here, just a rollover of unintended basis to a TIRA and taxable amounts to a Roth. The corrected amounts were still eligible rollover distributions.
  • There is an impractical solution for additional taxable amounts going to the Roth, which is to request a PLR for extended time to recharacterize a portion of the qualified rollover contribution to Roth to the TIRA. While the IRS would certainly grant the extended time, the high cost of the PLR makes this impractical. Further, with likely gains on the recharacterized amount being substantial since 2016, this approach is even more costly. Of course, this tax code provision was written long before all the current portability options. 
  • Did the plan provide any suggested solution in a letter with the 1099R Forms? They could have at least paid to process the amended 2016 (and possibly 2017 return if filed) tax return. 
  • A related issue is that some of these Notice 2014-54 split rollovers were reported on a single 1099R form, which causes entry problems into certain tax programs. Plans should be issuing separate 1099Rs for the amounts going to TIRA and Roth respectively. The IRS likely also has problems interpreting the combined 1099R due to Box 2a and 5 issues.
  • For situations of more basis/less pre tax, if the basis is small enough and the employee has no prior TIRA basis, they might just ignore it and not file Form 8606.
  • For situations with less basis/more pre tax, paying taxes on the pre tax amounts going to the Roth is somewhat less painful due to the likely gains in the Roth since the rollover.

Submitted by Bill Wright on Thu, 2018-03-08 15:19

Thanks for your response.  Doesn’t Proposed Treas. Reg. Section 1.408-4(h) allow the removal of the after-tax money from the IRA?  See, especially, Example 2 of 1.408–4(h)(5).

Submitted by Alan - IRA critic on Thu, 2018-03-08 16:56

Can you post a link to the proposed Reg?  

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