@Hippo24 wrote:
@Opus 17
Thank you very much for the input.
I have no problem paying the $160 penalty and I am willing to pay the $160 when I file the return so it is done correctly. The issue is that the 1099-R uses "Code 2" to indicate the $1600 is exempt from the penalty so how to include the $160 penalty when I file the return? If I manually choose "Code 1" when I put the 1099-R information in TurboTax, I will be able to pay the $160 penalty but the code will not match what IRS's copy of the 1099-R has.
Should I choose "I need to prepare a substitute 1099-R" at TurboTax to file a "4852" and explain it?
With all due respect to @DaveF1006 , I'm not sure he understood that the $1600 was not rolled over or converted. Only $6400 was rolled over, and $1600 was withdrawn. (It was sent to the IRS, but it still counts as a distribution, and you did not cover the distribution by making up the $1600 from other funds.)
I don't think it really matters if you enter the second 1099-R using code 1, or if you create a substitute 1099-R with the same information. Either way, the IRS computer will have a chance to put up a yellow flag. You might get a letter asking for an explanation. However, since your change results in you paying more tax, I suspect they will ignore it. What's more important is they will see $8000 coming out of the first plan, $6400 going into the second plan, and $1600 reported as income, which is what they will really care about.
(And to be honest, I don't think the IRS computers are all that smart after all. Just in the last week I've seen a post from someone whose elderly father neglected their RMD requirement for more than 10 years, and another post from someone who made 6 years worth of ineligible Roth IRA contributions. They are now asking how to do the right thing and fix it, but they never got red-flagged by the IRS. If you want to do the right thing and pay the $160, swap the code to #1. It's the simplest fix to get the right result.)
