1099R for refund of contributions to Inherited IRA causes increased tax as if it was an additional distribution

[svh777]

Morgan Stanley messed up and sent a RMD distribution from my Inherited IRA that didn't have to be made in 2020 ($21K). 

In an attempt to correct it for last year's taxes, I was instructed to send the $21K back to them, and deposit it back into the Inherited IRA account it came from.  It was received/posted by them to the account on 1/28/2021 but - bottom line - could not be applied to fix the 2020 error.  I ate the tax impact for 2020.

Since contributions cannot be made to Inherited IRAs, the $21K was refunded to me on 3/4/2021, thereby zeroing out the 2021 chaos of trying to fix their error.

I received the correct $18K RMD distribution from the account in October 2021.

Unfortunately, I've now received TWO 1099Rs on this Inherited IRA account.  One for the correct amount ($18K), and another for $21K.

The $21K 1099R has amounts in both box 1 and 2A, along with codes 8 and 4 in Box 7.  IRA box is checked.

When I enter it into Turbo Tax, it's handled as if it was a normal distribution, despite the explanation that it was a refund of a non-allowed contribution.  My taxes jumped significantly!

I'm trying (unsuccessfully so far) to get them to understand this $21K 1099R is incorrect,  as the only distribution I actually received was $18K.

Am I missing something?  How should this problem be corrected?  If I don't enter the amount in Box 2A, everything seems OK, but that will not match up with the copy the IRS receives.

Suggestions?

[ThomasM125]

You could not report the form 1099-R  on your tax return, or leave the box 2(a) entry empty. Either of those two options could result in the IRS suggesting a correction to your tax return in the future by assessing additional tax. You could respond to their proposed assessment with an explanation as to why you didn't report the income and that may resolve the issue.

You could also mail in your return with a statement attached explaining why you didn't report the form 1099-R or reported it differently than the way it was entered on the form. But that may not make a difference.

A third option would be to enter a negative adjustment to income to cancel out the pension income. This is how you would do that in TurboTax:

Go to the Wages and Income section of TurboTax

 - Choose  Less Common Income

 - Choose Miscellaneous Income, 1099-A, 1099-C

 - Choose Other reportable Income

- Enter a description for the adjustment and the amount as a negative number

@svh777

[Edited 3/2/2022 at 5:05 PM PST]

[dmertz]

The 2021 Form 1099-R with codes 8 and 4 in box 7 should show in box 2a only the gains attributable to the amount being returned.  Only this amount is taxable and only this amount will be included on Form 1040 line 4b.

If you were refunded $21k, how is it that you received only $18k?  Did they make a return of contribution of $21k but due to investment losses the loss-adjusted amount distributed was only $18k?  If so, the Form 1099-R should have a zero in box 2a.  If the amount in box 2a is equal to the amount in box 1, you should request a corrected Form 1099-R.  Box 2a equaling box 1 on a code 8 Form 1099-R is nonsensical.

[fanfare]

On your 1099-R with code 8,  taxable amount box 2a should be zero.

complain again to Morgan Stanley.

You may have to file 4868 request for extension of time to file.

OR

if you are using CD/Download, enter 2a = zero yourself and

enter the explanation of why you are doing that.

Include dates and amounts.

obviously it's preferable to get a corrected 1099-R.