How do I account for federal backup withholding taxes deducted from a dividend payment to my IRA?

[telchak]

The 1099-DIV is not reporting income paid to me, it was a dividend posted to my IRA account. There is no income to include in my tax return, but there is backup withholding taxes deducted from the payment.  How do I account for this situation?

[VolvoGirl]

That is weird.  The withholding should be considered a distribution.  You probably need to get a 1099R for that.  I would ask the IRA what's going on.  Was it a Dividend from inside your IRA or a Dividend that went INTO the IRA?   @dmertz 

[dmertz]

I agree, this makes no sense.  Perhaps the investment that generated the dividend is not properly titled, in which case it wouldn't be considered to be an investment in an IRA, or it's not properly tagged by the entity that generated the Form 1099-DIV as being held by an IRA which would make it exempt from reporting on Form 1099-DIV.

It seems to me that the IRA trustee would need to file Form 990-T to get credit for the tax withholding and a refund of the backup tax withholding back to the IRA.  Form 990-T Part III line 6e is for reporting backup withholding.  Page 3 of the instructions for Form 990-T indicate how to claim a refund of backup withholding:  https://www.irs.gov/pub/irs-pdf/i990t.pdf

I don't think that the backup withholding constitutes a distribution from the IRA since it's not creditable to the the IRA owner.

[telchak]

The dividend originated in my company 401K that was rolled over into an IRA managed by another financial institution.  The paying organization said they did not have a certified W9 on file at the time of the dividend payment (thank you Mr DeJoy and the USPS) and withheld taxes.  The dividend was paid to the rollover IRA.

[telchak]

Thank you for this response.  I will notify my IRA trustee and work with them to get the withheld taxes refunded into my IRA account (which was my follow-up question).

[dmertz]

Sounds like a timing issue where the investment did not receive a W-9 with a code 1 on line 4 indicating ownership by the IRA in time to avoid backup withholding on the dividend payment.

[telchak]

Update. The IRA trustee receiving the dividend payment said there was nothing they could do since they did not issue the dividend.  The IRA trustee paying the dividend politely refused to take any action on my behalf to get the taxes refunded to them and issue a corrected 1099-DIV to me. Probably too much paper work! I spoke with the IRS.  The agent told me I can claim the backup withholding taxes on my 2020 1040 form. When asked how I get the withheld taxes back into my respective IRA accounts, she said the optimal way was for the paying IRA trustee to initiate the appropriate action to get the taxes back and issue a corrected 1099; otherwise, she did not know of a direct method for me to get the withheld taxes back into the IRAs via standalone, separate actions.  She said I could contribute to an IRA via the normal methods if I am eligible.  She did point me to Publication 1281 Backup Withholding for Missing and Incorrect Names (82 pages) as a possible reference.  I scanned it, but it appears any actions to resolve my particular issue would still require the payer trustee to take action.

[ThomasM125]

It sounds like the dividend ended up in the rollover IRA, so it is not taxable. The withholding is taxable since it was paid to the IRS on your behalf. If you can make a deductible IRA contribution, you can do that for the amount of the tax withheld, and that would cancel out the tax amount applicable to the withholding.

You will need to report the withholding as a taxable pension distribution on your tax return. But you can deduct the taxes withheld from your tax for the year.