1099R was incorrect

[czeiszperger]

Got a letter in the mail from the IRS saying we owe a large amount of money. We got a 1099R for money that my husband withdrew from his IRA when he left his last company. I followed the turbotax prompts and entered all information from the 1099R correctly, however it appears that some information on that 1099R was incorrect and as a result, it looked like we rolled over some of that money into another IRA account when in fact, we did not. I am unsure what we are supposed to do at this point. Obviously, we owe the money, but I am not sure how I would have known that info on the 1099R was incorrect as I was following turbotax and entering what was on the 1099R. I don't even know what I am trying to ask other than how would I have known the information was incorrect and is there anything I can do besides pay the IRS the amount they say we owe? Thanks!

[macuser_22]

First, if it was a company plan, it was not an IRA - it was probably a 401(k) or 401(k) Roth plan.  (IRA's are personal retirement accounts held by a bank or financial institution.)

What code was in box 7 on your 1099-R?

Was the IRA/SEP/SIMPLE box checked (or did you check it by mistake).

What was in box 2a?

What tax year was this for?   If 2017 was the taxable amount reported on the 1040 form line 16a?   Was ROLLOVER printed next to it?    (If 2018 that would be line 4 in the 1040 form).

[czeiszperger]

Yes, thanks for the correction, it was not an IRA.

code in box 7 was G.

The IRA/SEP/SIMPLE box was not checked

in box 2a the amount was 20,357.06

this was for tax year 2017

the taxable amount was reported on line 16a and I do see off to the side in bold letters Rollover.

[dmertz]

Code G indicates that the plan believed that your husband requested a rollover to another qualified retirement account (a Roth account in this case) and the check should have been made out to the receiving retirement account (or at least the financial institution at which the receiving qualified retirement account would be held, but that's less proper) for the benefit of your husband.  As such it was impermissible for the receiving institution to simply cash the check and give the cash to your husband instead of depositing as a rollover it into a proper qualified retirement account like a Roth IRA.  TurboTax has no way to know that the funds were improperly diverted so it treated the code G Form 1099-R as the rollover that it indicates.   TurboTax normally would include the box 2a amount in your taxable income since a nonzero value there indicates a rollover to a Roth IRA or to a designated Roth account in the company's plan.  However, you apparently indicated to TurboTax the no rollover to any type of Roth account occurred so TurboTax instead treated it a nontaxable rollover to a traditional qualified retirement account by assuming that the amount in box 2a was incorrect.  (It seems that TurboTax does not flag an error under these circumstances.)

It's also possible that the plan simply put an incorrect code in box 7.  That would certainly be the case if the check had been made out to your husband.

It's up to you to review the tax return that TurboTax prepares to see if the amount of taxable income makes sense.  Had you recognized the discrepancy when preparing the tax return you could have entered a substitute Form 1099-R with code 1, 2 or code 7 (depending on your husband's age and when he left the company providing the plan) and explanation to make the distribution taxable and potentially subject to early-distribution penalty.

Apparently the IRS recognized that a code G Form 1099-R with a nonzero amount in box 2a should have been taxable, indicating a taxable rollover to a Roth account.  An individual improperly diverting a rollover check is not particularly unusual, so the IRS often questions the completion of the rollover indicated by the code G.

[macuser_22]

A box 7 code G is a direct trustee-to-trustee rollover.  If you were given a check then the check shroud have been make out to your IRA.

Since box 2a has an amount  (I will assume that it is the same as box 1 unless there is also an amount in box 5) and is not zero then it would appear that it was being rolled into a Roth IRA which is taxable.   Box 2a would be zero if being rolled into a Traditional IRA.

For 2017, the box 2b amount should have been on the 1040 form line 15b and included in your AGI as taxable income.

However, it you entered a code G 1099-R into TurboTax and answered NO to the rollover into a Roth IRA which would be taxable, then the only other possibility is that it was rolled into a Traditional IRA that is not taxable.   It would appear that is what was done since it ended up not taxable.  A code "G" can ONLY be rolled into a Roth IRA (taxable) or Traditional IRA (not taxable) and nothing else.  TurboTax gives you no other choice because tax law does not allow anything else with a code G.

Are you saying that you did NOT complete the rollover?

What did you do with the money?

You never should have entered the 1099-R if it did not reflect what you actually did.   If the 1099-R did not match the facts then you should have requested a corrected 1099-R from the plan trustee or used a substitute 1099-R coded to fit the facts.

Unfortunately this is what can happen when you enter a form that is different from what actually happened.   Unless you actually rolled the money into a Traditional IRA you will owe the tax that should have been on your 2017 tax return had the 1099-R been entered properly.

[BMcCalpin]

You asked: "I don't even know what I am trying to ask other than how would I have known the information was incorrect and is there anything I can do besides pay the IRS the amount they say we owe?"

The discussion here is informative, but may not help you if you don't know what actually happened - was the 1099-R actually filled out incorrectly by your company? It seems that it was, but it is difficult even for the excellent tax professionals here to be sure without seeing your documents and asking some additional clarifying questions.

I am assuming that when the IRS wrote you a letter asking for the payment of taxes, that they also added on penalties and interest to the amount? If so - and since you confess a lack of expertise in this situation - I would encourage you to contact a local Enrolled Agent (see https://taxexperts.naea.org/ ) or a local CPA (each state has their own look-up). If the company issuing the 1099-R made errors on the 1099-R, the Enrolled Agent or the CPA should be able to draft a reply to the IRS asking for an abatement (waiver) of at least the penalties due to the company's error.

You have probably seen that the IRS wants a reply within three weeks or so, so don't delay. Even if you can't get professional help soon enough, reply to the IRS stating that you are researching the issue and expect to have a reply to the IRS within another three weeks. Always reply to the IRS in a timely fashion, even if you don't have all the answers yet. Both the Enrolled Agent and the CPA can be empowered by you to represent you before the IRS and to take over the conversation with the IRS and negotiate a solution.