1099-R with both taxabale amount and "taxable amount not determined"

[taxmeplenty]

I'm a Betterment customer, and made an accidental excess contribution to my Roth IRA with them. I withdrew the excess, plus earnings. As a result I got a 1099-R from Betterment.

On Betterment's form, they both specify the taxable amount, and tick the box for "taxable amount not determined." The taxable amount they specify is the same as the gross distribution. Here's the full form:

Box 1 Gross Distribution $1234.56
Box 2a Taxable Amount $1234.56
Box 2b Taxable Amount Not Determined Yes
Box 2b Total Distribution No
Box 4 Federal Income Tax Withheld $0.00
Box 7 Distribution Code(s) JP
Box 7 IRA/SEP/SIMPLE No
Box 14 State Tax Withheld $0.00
Box 17 Local Tax Withheld $0.00

(For privacy, I changed the amount in boxes 1 and 2a, but my form also has a value in the low thousands.)

It does seem like this form violates IRS instructions, which say for box 2a, "for the distribution of excess Roth IRA contributions, report the gross distribution in box 1 and only the earnings in box 2a." They further say, "if you are unable to reasonably obtain the data needed to compute the taxable amount, leave this box blank," which Betterment didn't do.

Betterment's 1099-Rs have been discussed on these forums previously, and I know from those posts (especially this one and this one) that one option is for me to file a Form 4852, and assert that Betterment's form is incorrect.

My question is, is there a way to file Betterment's 1099-R as issued, and tell TurboTax the taxable amount somewhere else? I do know the taxable amount, because I took screenshots at the time of the withdrawal, where it was calculated on the spot. I also confirmed this amount with their support group. TurboTax has a little help text bubble saying that if you tick the "taxable amount not determined" box, "We'll help make sure the correct amount of your distribution is taxable," yet I didn't see any prompts or questions along these lines. Instead, I can tell from fidgeting with the form that TurboTax seems to be using the amount in box 2a as the taxable amount, even with "taxable amount not determined" checked.

The problem with using Form 4852 is the hoops you have to jump through: Request a corrected 1099-R from the custodian (already done in my case), contact the IRS to report you couldn't get one, and then paper file your return. It would be nice if I could e-file.

[macuser_22]

That 1099-R is clearly improper.    First if there is a box 7 code JP (that means a return of 2019 excess Roth IRA contributions returned in 2020 but taxable in 2019) then ONLY the earnings that were returned are shown in box 2a and the "not determined" box cannot also be checked becuse it is always determined for a Roth code JP.

Second, box 1 and 2a cannot possibly be the same, that would say that your original contribution and the earnings are the same which is impossible.    Box 1 must always be more than box 2a because contributions are not earnings.   Box 1 must be the amount of your original contribution that was returned plus any earnings attributed to that contribution, and box 2a is *only* the earnings.

The IRS 1099-R instructions say how to fill out the 1099-R.

https://www.irs.gov/instructions/i1099r

[quote]

Roth IRA.

For a distribution from a Roth IRA, report the total distribution in box 1 and leave box 2a blank except in the case of an IRA revocation or account closure and a recharacterization, earlier. Use Code J, Q, or T as appropriate in box 7. Use Code 8 or P, if applicable, in box 7 with Code J. Do not combine Code Q or T with any other codes.

However, for the distribution of excess Roth IRA contributions, report the gross distribution in box 1 and only the earnings in box 2a. Enter Code J and Code 8 or P in box 7.

[macuser_22]

BTW: I have seen MANY improper 1099-R's from Betterment - not a company that I would do business with since they don't seem to know the basics of proper reporting.

[taxmeplenty]

Thanks so much for looking at this @macuser_22. I made the same assertions to Betterment Support. After a couple rounds, their final reply was:

You will need to report that using the 1099-R form as issued, because Betterment does not report the taxable amount for any IRA transactions.

Are you in essence saying filing Form 4852 is the correct, and only, way to handle this situation?

BTW, you do have the years right. I am trying to amend my 2019 return.

[macuser_22]

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@taxmeplenty wrote:

Thanks so much for looking at this @macuser_22. I made the same assertions to Betterment Support. After a couple rounds, their final reply was:

You will need to report that using the 1099-R form as issued, because Betterment does not report the taxable amount for any IRA transactions.

Are you in essence saying filing Form 4852 is the correct, and only, way to handle this situation?

BTW, you do have the years right. I am trying to amend my 2019 return.

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Yes.   A substitute 1099-R in TurboTax is the 4852 form.   It will ask for an explanation of why you are filing a substitute and the steps you took to get it corrected.   Enough complaints about Betterment might get the IRS to impose a fine on them.

If you do not know the actual earnings to put in box 2a then from statements you need to determine the IRA value immediately after the excess contribution and again at the time  of distribution.  The difference it the total earnings in the account during that period.  The prorate the amount of the excess with the account value to find the earnings attributed to the excess amount.   If zero or a loss, then enter zero.

[macuser_22]

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@taxmeplenty wrote:

You will need to report that using the 1099-R form as issued, because Betterment does not report the taxable amount for any IRA transactions.

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In addition a Code JP is a "return of contribution" and not a distribution (an IRA transaction).     The "not determined box SHOULD be checked for a distribution but code JP is NOT a distribution - it is simply giving you your contribution back which is not taxable but the earnings are and the IRA custodian is supposed to calculate those earnings.

[taxmeplenty]

Thanks @macuser_22. Following the instructions on Form 4852, I called the IRS today to discuss Betterment's 1099-R. They didn't say quite what I expected. I don't have the time or energy to write it up right now, but I'll post back to this thread this weekend if not earlier.

[macuser_22]

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@taxmeplenty wrote:

Thanks @macuser_22. Following the instructions on Form 4852, I called the IRS today to discuss Betterment's 1099-R. They didn't say quite what I expected. I don't have the time or energy to write it up right now, but I'll post back to this thread this weekend if not earlier.

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Depending on who you talk to at the IRS, you can get all kinds of different answers, unless you can get by the phone reps (who tend to guess a lot) to a 2nd tier specialist  in the subject.

[taxmeplenty]

Back to close this up.

I'm not sure whether I got a second level rep. The first person I spoke with transferred me to "Customer Service," and that person in turn transferred me to someone with "IRAs, Pensions, and Social Security benefits."

Anyway, the IRS agent encouraged me not to file a Form 4852, but rather to input into TurboTax the 1099-R as I wish I'd received it, with earnings specified. To be specific, I would put:

Box 1 Gross Distribution $1234.56
Box 2a Taxable Amount $12.34
Box 2b Taxable Amount Not Determined No

The rationale was that if I weren't filing an amendment, and we were back during the normal time window to file the initial return in 2020, I wouldn't have had the 1099-R from Betterment yet. Although the 1099-R from Betterment does say it will be furnished to the IRS, the IRS also wouldn't have had a copy at the time of filing.

I have always thought it was an inviolable rule of tax returns that you report exactly what you receive from financial institutions, but that apparently is not so. The agent actually said he thought it would be more confusing than helpful to file Form 4852 because it would be arriving in calendar year 2021, correcting a 2020 tax form, and applicable to a 2019 return. He thought the mixture of years might trip up the system and bring pointless scrutiny to my return. Although filing Form 4852 might seem like the logical thing to do, "taxes don't always work logically," he said.

As for complaining about Betterment, that went nowhere. First, he said, they don't pursue issues with "prior year" tax returns. Even if they did though, since Betterment checked the "taxable amount not determined" box, that basically exempts them from having any responsibility over what goes in box 2a. I got the sense they could put "LOL" in box 2a and the IRS wouldn't blink.

The good news out of all this is that taking this approach — filling out the 1099-R as if Betterment had broken out the earnings — means I don't have the complexity of including Form 4852 and paper filing my return. I'm not surprised I didn't figure this out during my initial filing, because I wouldn't have thought to pretend to have received a form I didn't receive. That said, I'm happy with this as a result. I just wish it hadn't taken more hours than dollars that I owe in tax.

[macuser_22]

However, I would not be surprised if you receive a bill form the IRS in about a year for the tax, since the 1099-R that they now have will not match what ia on your amended return.   The substitute 1099-R has an explanation statement that explains it but simply using a regular 1099-R does not.   IRS computers do the matching and generate the letters in most cases, humans do not review them.   I always thing it better to file the substitute with the letter.

I always advise to NOT file a "dummy" 1099-R prepared correctly with the original (2020) tax return before receiving the actual 1099-R in order to avoid having to amend later unless you *KNOW* that the IRA custodian will issue a 1099-R with code JP, box 1 with the total returned amount and box 2a is only the earnings and the trustee tells you in advance exactally what will be on the 1099-R.

[taxmeplenty]

Hum, interesting. Well, I think I'm going to go with what the IRS agent suggested I do, if for no other reason than I'll have a pretty easy time explaining why I did it if that comes up (I did record the agent's identification number).

Thanks for all your help. I probably won't update with a play-by-play, but I'll try to update this thread if something big happens in this case, and I'll do my best to come back here next fall to update if nothing happened.

[epcot]

I'm so upset my IRA provider was bought out by Betterment, because yikes this has been a hassle and a half.

I have the same situation of having deposited and withdrawn Roth IRA excess, and they put the same amount in 1 and 2a, then checked 2b.

Their solution was first to tell me to use form 8606, then:

"If you are withdrawing excess contributions, you have to use a similar process as the 8606 (but outside of the 8606), determining your taxable vs tax free portion of your distribution which will end up on the 1040 itself."

[macuser_22]

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@epcot wrote:

I'm so upset my IRA provider was bought out by Betterment, because yikes this has been a hassle and a half.

I have the same situation of having deposited and withdrawn Roth IRA excess, and they put the same amount in 1 and 2a, then checked 2b.

Their solution was first to tell me to use form 8606, then:

"If you are withdrawing excess contributions, you have to use a similar process as the 8606 (but outside of the 8606), determining your taxable vs tax free portion of your distribution which will end up on the 1040 itself."

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The 1099-R should have had a code 8 or P for a "return of contributions. If they refuse to correct the 1090-R then refer to prior posts in this thread on how to file a substitute 1099-R.

[epcot]

Yea, it does say 8J but then has the exact same amounts in box 1 and 2a. Hope my printer's ready to mail this out to the state 🤡

Thank you for your help on this. I've quickly learned to... quite dislike Betterment

[macuser_22]

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@epcot wrote:

Yea, it does say 8J but then has the exact same amounts in box 1 and 2a. Hope my printer's ready to mail this out to the state 🤡

Thank you for your help on this. I've quickly learned to... quite dislike Betterment

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Box 2a on a 8J should only contain any earnings attributed to the excess, not the total excess.