Who can file a 1099R?

Submitted by Jennifer Hansen on Thu, 2023-10-19 16:02

On another thread an answer mentioned that lawyers could file a 1099R for a restorative payment but usually don’t. Can a non-custodial payer of a restorative payment (for example, a company that held assets for a self directed IRA) report a 1099R?



Submitted by Alan - IRA critic on Thu, 2023-10-19 16:39

  • It appears that they are required to file the appropriate tax form. From the IRS website:
  • “The General Instructions for Certain Information Returns provides that for information return reporting purposes, a payment made on behalf of a claimant is considered a distribution to the claimant and is subject to information reporting requirements. Consequently, defendants issuing a settlement payment or insurance companies issuing a settlement payment are required to issue a Form 1099 unless the settlement qualifies for one of the tax exceptions.”

Submitted by Jennifer Hansen on Thu, 2023-10-19 17:34

  • What is the appropriate tax form for a payer of a restorative payment?  Restorative payments are one of the tax exceptions aren’t they? 
  • A payee needs to have how receiving custodian reports something match with how the payer reports it.  But how does the payer know how to report it.  Is there guidance about it anywhere?  Or a norm?  (specifically interested for a non-custodian payer)
  • One of the problems I’m finding is that a payer may disagree that a restorative payment can be deposited with another custodian and so feel like they are bound to do tax reporting when it is deposited with another custodian.  A restorative payment returned to a retirement account isn’t taxable income but if they don’t have a way of knowing it is returned are they duty bound to file a 1099Misc?  Or can they file a 1099R if they aren’t a custodian, are there rules around that (I can’t find them)?  Or should they just not report if the settlement agreement defines the payment as a restorative payment?

Submitted by Jennifer Hansen on Thu, 2023-10-19 18:18

“Generally, do not report a transfer between trustees or issuers that involves no payment or distribution of funds to the participant,”https://www.irs.gov/instructions/i1099rCould the noncustodian payer of the restorative payment be considered an “issuer” and also long as the money doesn’t go to the account owner just goes to lawyer and then retirement accounts then it’s nonreportable transfer?

Submitted by Alan - IRA critic on Thu, 2023-10-19 18:37

  • For recovery of retirement plan assets, the form would be a 1099R.
  • Generally, the form would be completed as the original custodian would have. However, in the vast majority of these cases there would be no form because a check payable to the IRA of the taxpayer would be treated as a direct non reportable transfer. 
  • Legal firms issue recovery checks in many different circumstance. It they issue a 1099R, 1099 MISC, or 1099 NEC the taxpayer will probably need to present some documentation to the receiving custodian indicating a restorative payment so the custodian will accept it. They would probably then issue a 5498 reporting a rollover contribution and the taxpayer would have to report the income on their tax return where the 1099 type instructions indicate and include an explanatory statement indicating a restorative payment was being returned to the IRA. 
  • The process would be dictated by how the legal firm reports the payment. In some cases the taxpayer may have to improvise to report the payment/rollover. A direct transfer is certainly preferable to avoid additional confusion.

Submitted by Jennifer Hansen on Thu, 2023-10-19 18:46

Would the payer be be expected to (or justified in) filing a 1099R because they gave the funds to lawyers to distribute and so have no control over if it gets sent to retirement accounts?  Lawyers are willing to work with clients on reporting if they can.  Thank you for your help!

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