Transfer not Rollover Question

Submitted by Ryan Freberg on Tue, 2020-09-08 15:30

@theslottreport

Had a quick question for you..

I have an IRA that money was sent “Custodian FBO” to another custodian however the previous custodian coded this as an indirect rollover. They stated they could not correct the 1099R based on not receiving a letter of acceptance from the new custodian.

My new custodian coded this as a transfer. How can I reflect this as a transfer to the IRS even though the previous custodian will not change the coding?

Thank you for all of your help!



Submitted by Alan - IRA critic on Tue, 2020-09-08 16:09

One good thing to come of this is that you will not have to deal with the former custodian again. They made an error and now want to inconveniene both you and the new custodian who took their business, rather than issuing a corrected 1099R showing 0.  Other than reporting a distribution that did not occur, this will not be a problem unless you run up against the one rollover limit for 12 months.  First, you might elevate your case with the old custodian to someone who understands the 1099R guidance from the IRS, and if they still will not correct it, tell them you are reporting them to the IRS (even if you do not want to bother). Another possibility if you have copies or documentation including your account statement from the new custodian showing a transfer is to not report the 1099R distribution on your return, but include an explanatory statement with your transfer evidence explaining that a direct trustee transfer was done, no 5498 was issued, and therefore you are not reporting the 1099R. Do not pursue this approach unless you have excellent documentation.  Finally, if you are 99% sure you can avoid a second rollover in 12 months you could report the 1099R as a distribution and rollover, but the lack of a 5498 may still trigger an IRS inquiry.  There is no excuse for the behavior of the original custodian if you are correct about the transfer.

Submitted by Ryan Freberg on Tue, 2020-09-08 16:17

Alan, Thank you for your reply. Unfortunately this would run into the one rollover per twelve months rule and I believe the explanatory statement might be a better course of action. I have a statement from the new custodian reflecting the coding of the distribution as a “transfer”. Is there any other documentation that would make sense to include outside of a explanation statement?

Submitted by Alan - IRA critic on Tue, 2020-09-08 16:42

  • I guess you already used up your one permitted 60 day IRA to IRA rollover, making this (2019?) 1099R distribution not eligible for rollover unless the IRS approves your explanation that the latest 1099R was incorrect.  The account statement from the new custodian is your best documentation, and it will show a date the transfer was accepted, but it will also help if you have a copy of an account statement from the former custodian showing the date and amount of the “distribution” they reported. The IRS will then know that the two statements apply to the same transaction.  While this should work, the decision by any particular IRS examiner is not guaranteed. In the end if the IRS does not agree, you would have an excess regular contribution to the IRA to remove, but you might be able to use Rev Proc 2016-47 to extend the 60 day rollover deadline and make this into a Roth conversion which is not quite as bad. A conversion would still be taxable, but no penalty, and you end up with a Roth conversion contribution which is better than loss of the funds to any type of IRA. That would still not be great, but better than a taxable distribution.  But the IRS should agree with you with good documentation. 
  • Was the old custodian a bank?  Brokerage firms rarely make this form of error.

Submitted by Ryan Freberg on Tue, 2020-09-08 16:53

Alan thank you again. Your knowledge is very much appreciated. The prior custodian(s) is an annuity company. There is two distributions that should be classified as transfers from different annuity companies. Each stated a letter of acceptance was needed from the new custodian even though the check was made out to the new custodian FBO and the new custodian reflected the accurate coding of transfer on their statement.

Submitted by David Mertz on Tue, 2020-09-08 17:07

  • Ideally the check would have been made out to your new IRA FBO you rather than just the new custodian FBO you.  However, since the new custodian deposited the check directly into the IRA account and has treated it as a transfer by not reporting receipt of a rollover, this should not be an issue.  If you have a copy of the check or anything else supporting that the check was not made payable to you personally, that would be good documentation to support that this was indeed a transfer and not a distribution and rollover.
  • I observed a somewhat similar situation where an Roth IRA held at a bank (a bank that we saw make many errors with IRAs) was inherited by the decedent’s spouse and, inexplicably, the funds were moved to an inherited Roth IRA rather than to a Roth IRA owned by the surviving spouse.  That was corrected by doing a transfer to an owned Roth IRA at the same custodian, yet the transfer was coded as a distribution from the inherited account even though it was coded as a transfer to the owned account.  After many months, the bank finally issued a Form 1099-R showing that there was no distribution (although their system left blank any boxes showing zero dollars, so the corrected form looked rather odd with nothing but the distribution code).
  • In the absence of getting the old custodian to correct the Form 1099-R, you could file a substitute Form 1099-R (Form 4852) showing $0 distributed and provides places where you can explain the problem with the original and your efforts to get the custodian to make the correction.
  • Generally, it’s best to initiate a transfer at the receiving custodian and allow the receiving custodian to manage the process.  That usually makes it harder for the old custodian to make a mistake.

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