Incorrect 1099-R

[gdanziger]

I am having an issue with my self-directed brokerage firm.  When the brokerage paid an inherited IRA distribution (full liquidation), they made a processing error and made the distribution twice including sending tax withholdings to the state and federal tax authorities twice which overdrew the account by the amount of the gross distribution.  I received net payments twice.  I sent back the second net payment but they were unable to get the tax authorities to refund the excess withholdings, so the account is still overdrawn by the amount of the second set of tax withholding payments which they are asking me to pay back.  Unfortunately, they added the duplicate tax withholding payment to the gross and taxable distribution on my 1099-R and won't correct it to reflect the correct taxable distribution.  

If they reflected had distributed correctly, the withholdings would have covered the tax liability and I would have paid no taxes.  If they reported the correct distribution amount on the 1099-R, I would get refunded the exact amount of the overdrawn account and would be happy to pay back.  But grossing up the distribution by the excess tax amount paid causes me to come up short on my refund to address the overdraft.

I have tried to resolve with the company and had the IRS send a letter, but they won't make the change.  Do I just submit the supporting documentation along with Form 4852 or are there other recommendations?

[DavidD66]

I think you are on the right track.  The IRS isn't going to be able to do anything further to help resolve the issue until you file your return.  As you send, submit your return with Form 4852 along with a letter of explanation, and whatever supporting documentation you have.  if, after filing, the issue isn't resolved, I would contact the Taxpayer Advocate Service for assistance.

[dmertz]

"Unfortunately, they added the duplicate tax withholding payment to the gross and taxable distribution on my 1099-R and won't correct it to reflect the correct taxable distribution."

This was improper for them to do.  They should have added the excess withholding only to boxes 4 and 14, not to box 1.  They effectively sent to you or credited to you as tax withholding money that did not actually come from the inherited IRA.  Overdrawing an IRA really isn't technically possible, the money had to come from somewhere else and showing it as an overdraft of the IRA is an internal hack.  Given that they are refusing to correct the Form 1099-R, you'll need to file a substitute Form 1099-R to correct the gross amount shown in boxes 1 and 2a.

The entire gross amount of the duplicate distribution, including the amount withheld for taxes, does need to be paid back to them.  You'll get the excess tax withholding back as part of your tax refund.