Incorrect 1099-R Box 7 Code S

Submitted by William Tuttle on Tue, 2023-12-12 22:44

How to report an incorrect 1099-R Box 7 Code S, caused by a SIMPLE IRA custodian not accepting proof of the date of first contribution from a rollover.

Form 5329 Instructions for Line 2 provide Exception 12 for an incorrect Code S.

How/should proof be provided that the distribution occured >= 2 years after first contribution



Submitted by David Mertz on Tue, 2023-12-12 23:45

  • I know you’ve in the past said that the establishment date carries over with the rollover, if it’s an earlier date, but where does the tax code or the IRS say that?  I can’t find it.
  • I’m not sure that code 12 on Form 5329 applies.  Code 12 seems to be for indicating that the distribution is not an early distribution.  Even though code 1 might be proper instead of code S, it’s still an early distribution.  It might be necessary to instead submit a substitute Form 1099-R (form 4852) to claim code 1 instead of code S and where explanation can be provided.
  • As far as documentation is concerned, that would be transaction records and, if done by rollover rather than trustee-to-trustee transfer, Forms 1099-R and 5498.  I don’t know that it would be necessary to supply that documentation unless the IRS asks for it.

Submitted by Alan - IRA critic on Wed, 2023-12-13 00:14

  • Authorization is from H-5 of Notice 98-4.
  • Suggest just retaining documentation of the first contribution, be that from a W-2 Box 12 coded S or a 5498 with “SIMPLE” checked in Box 7 for a year ending before the 2 year waiting period began. The IRS will probably never ask for it, but it’s best to be prepared if they do. A copy of a SIMPLE IRA statement showing a contribution date outside the 2 years should also suffice. If the gap is tight, an IRA statement showing the date of the distribution would also be needed to document the required 2 year interval.
  • Similar documentation would be needed if the taxpayer did a rollover that appeared to be ineligible because of the 2 year period. In this case the taxpayer would be documenting the legitimacy of the rollover to avoid income tax on the distribution and an excess contribution to the receiving account.
  • If the taxpayer qualifies for a total penalty exception, they should use that exception code on the 5329 instead of exception 12. That would waive the entire penalty. Otherwise, the exception 12 would just reduce the penalty from 25% to 10%, and the 10% rate should be used for the penalty on line 4. Might need an explanatory statement re this 5329 situation.

Submitted by David Mertz on Wed, 2023-12-13 02:42

Form 5329 line 2 is for reporting amounts that are *exempt* from the additional tax, not for reporting amounts on with the penalty is reduced but not eliminated.  That’s why I think it is appropriate to use Form 4852 which will provide space for an explanation (and to permit tax software to naturally handle the preparation of Form 5329).

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