Form1099-R: Asking to Explain Excess Withdrawal

[gypsydan]

Hello,

At the end of 2022 I was the owner of 96 shares of a company's preferred stock in a Traditional IRA.

During the 2023 Tax Year I converted 6 shares to a Roth IRA.  Upon receiving Form 1099-R for 2023 I noted that boxes 1 (Gross distribution) and 2a (Taxable amount) each had a value of $196.50.  In addition, box 2b (Taxable amount not determined) was checked and Box 7 (Distribution code(s) showed codes 7K.  I filed my taxes and all seemed good.

During the 2024 Tax Year I converted the remaining 90 shares to the same Roth IRA.  Upon receiving Form 1099-R for 2024 I noted that boxes 1 (Gross distribution) and 2a (Taxable amount) each had a value of $0.00.  In addition, box 2b (Taxable amount not determined) was NOT checked and Box 7 (Distribution code(s) again showed codes 7K. However, I am now being prompted to "Explain Excess Withdrawal".

Not sure why I am having to provide an explanation?  Or for that matter, what information would need to be included?  Did I miss something with the 2023 Tax Return, or is there something else going on?

Thanking the community in advance for any help.

Thanks- Dan

[DianeW777]

First, it's unclear why your 1099-R would have a zero in box 1 and 2a.  The value of the shares is required to be entered there and to be taxed.  Any money going from a Traditional IRA to a Roth IRA are taxable funds.  This assumes you deducted the amounts used to purchase the stock because they were used to establish or contribute to a Traditional IRA.  If the amount in in your Traditional IRA was zero there would be nothing to transfer. 

Find out the actual values and request a corrected form from the plan administrator of the Traditional IRA. Once this is completed you should be able to complete your tax return.

[gypsydan]

Hello,  

The most likely scenario for why boxes 1 and 2a have a $0.00 amount for the 2024 Tax Year is that these preferred shares were impacted by SEC Rule 15c2-11 which took effect back in Sept 2021 (if memory serves me correctly).  The company chose to no longer provide current info to OTC Markets (I think) and as a result these shares were sent to the Expert Market.  It is likely that there was no trading during the 2024 from which to determine a FMV.   It strikes me as a bit odd that there was enough information in 2023 for someone to determine a FMV.

I knew of few other investors (through various investing sites) in this same situation but have been unable to to locate them.

So perhaps I need to make contact with my Broker to find a solution??

Thanks- Dan

[dmertz]

Code K indicates that investments that do not have a readily available FMV were distributed.  The $0 amount in boxes 1 and 2a with box 2b Taxable amount not determined not marked on the Form 1099-R suggests that the custodian has determined that those investments have $0 of value.  The instructions for Form 5498 say that such assets should be reported at the FMV determined on December 31.  It would seem that the same rule should apply to amounts reported on Form 1099-R.  It's possible that they made no effort to determine the value of these shares since none remained in the traditional IRA.  However, it seems to me that they should have valued the shares anyway since the shares still exist.

You are getting TurboTax's request for explanation because TurboTax interprets a zero in box 2 for a distribution from a traditional IRA reported with code 1, 2 or 7 in box 7 as indicating a distribution of excess contribution after the due date of the tax return.

If the shares truly had zero value at year end, it seems that the $0 amount reported in box 1 is accurate and you could just omit the Form 1099-R from TurboTax.  Otherwise, you would probably have to determine the actual year-end value and file a substitute Form 1099-R (Form 4852) to report the true taxable amount.

[gypsydan]

Hello,

Recent trading of BANGN according to OTC Markets is as follows-

Date                          Volume            Price

1/6/2025                  5                       $75.00

1/17/2023                1                       $98.25

1/17/2023                1                       $98.25

11/10/2022              6                       $98.25

10/24/2022              150                   $125.00

10/25/2021              40                     $135.00

So with the above info and the fact that the implementation SEC Rule 15c2-11 which sent this security to the Expert Market thereby making it next to impossible to determine a fair market value one could say that the fair market value at the time of the conversions (there were five in 2024) was $0.00.

Secondly, I am not completely understanding what you are saying when you say"... just omit the Form 1099-R from Turbo Tax.".  Would that not raise a red flag with the the IRS??

Lastly, Turbo Tax is asking me to provide an explanation for Excess Withdrawal.  Is it possible that this is due to the fact that there were 5 conversion transactions from an TIRA into a Roth IRA?  I add this last point because I believe there is a rule that says that you cannot make more than one rollover from the same IRA  to another IRA within a 1-year period, with one of the exceptions to the one year being rollovers from a TIRA to a RIRA (i.e. conversions). So it seems to me that I would NOT need to offer up an explanation since all my transactions were from a TIRA to a RIRA.

Hope this helps.

Thanks- Dan Hayden

[dmertz]

" Would that not raise a red flag with the the IRS??"

With a zero in box 2a, the information from the Form 1099-R will not add anything to your tax return even if entered and will not affect you income as calculated by the IRS Automated Under-reporter System, so I don't see how the IRS would detect any discrepancy.

TurboTax is asking for the explanation because of the zero in box 2a which has special meaning to TurboTax.  Omitting the Form 1099-R eliminates the problem.

[gypsydan]

Hello,

I now have a slightly better understanding of what you are saying but am still just not at the point of omitting the Form 1099-R even if the impact is nil.  My wife, on the other hand, says to omit it and move on because we are "just small fish in a vast ocean" to the IRS.  And she is probably right.

Now suppose I decide to go ahead and include Form 1099-R.  What becomes of the explanation?  Will it impact anything further on down road on the way to filing taxes??    

Thanks