If you contribute and then do a removal of the contribution in the following year (but before filing), then you have to report earnings. There is no penalty, because it's as though the contribution never even happened. The earnings are actually handled in the "other income" category, since you will not have the 1099-R yet. It looks like this (example):
2022 IRA Contributions Returned to You in 2023
Special rules apply to amounts that you contribute to your traditional or Roth IRA and that are
returned to you in 2023. These amounts may be reported to you on a 2023 Form 1099-R that has a
code "P" in box 7.
What contributions qualify?
The IRA contribution must meet all of these requirements:
• The contribution was made in 2022.
• The contribution was returned to you in 2023, with any related earnings or less any loss, by the
due date (including extensions) of your 2022 tax return.
• You didn't take a deduction for the contribution.
What contributions don't qualify?
• IRA contributions that were returned on a 2022 Form 1099-R with a code "P" in box 7 don't
qualify
