Report Foreign Pension -Treaty Exempt with dummy 1099-R, no Form 8833 required

[LucyLiu5]

After reviewing multiple posts, I tested the following method to report my foreign pension with tax-treaty exemption for reporting purposes only. It works well with TurboTax (TT). I want to confirm whether this is acceptable by the IRS.

Option 1: Report pension as non-taxable income in 1040 Line 5a, leave 5b as 0 (zero).

• Create a dummy 1099-R with TIN 99-0999999, Distribution Code: 7.

• Enter pension amount in Box 1, 0 (zero) in Box 2a.

• Use Form 4852 to explain the substitute 1099-R, with the description:
  Gov’t Public Pension – Treaty Exempt (U.S.-XX Tax Treaty, Article 17).

• Explain why no 1099-R: No 1099-R for Gov’t Public Pension – Treaty Exempt, Reporting Only. Form 8833 is waived as reporting the income from public pension.

Option 2: Report it as taxable income in 1040 Line 5b.

• Follow the same steps as Option 1 to create the dummy 1099-R.

• Fill in Box 2a with the same amount as Box 1.

• In Less Common Income → Miscellaneous Income → 1099…/Other Reportable Income, enter the amount as a negative entry, with the description:
  Offset Taxable Income from Gov’t Public Pension – Treaty Exempt (U.S.-XX Tax Treaty, Article 17), No Form 8833 Required.

Option 2 was recommended by several individuals, while I have not seen any suggestions for Option 1.

Question:

Is Option 1 acceptable by the IRS? Has anyone used either option to report foreign pension (tax-treaty exempt) without filing Form 8833 successfully, without facing an IRS audit?

Highly appreciated!

[SusanY1]

The Option 2 is likely suggested by several individuals because it is the one that will allow you to electronically file your tax return.   

I have filed many tax returns using the second option and several have resulted in the IRS asking additional questions, but those questions have been easy to answer the vast majority of the time.  

Option 1 "signals" the IRS that there should be a form out there (1099-R) that it can't see and that may also cause them to inquire. However, if you should get an inquiry from the IRS you would have the option then to fully explain the nature of your income to a human who can understand it and you shouldn't have a problem after that. 

The problem with either of the options presented is that the first "read" of your tax return is nearly always by a computer with no human involvement at all.  When that computer doesn't see what it expects, it is more likely to spit out an inquiry for more information and send the file over to a human.  

All of that to say, either option has the potential to cause the IRS to reach out, but the odds are still fairly small.  Because the computer does the first "read" it won't pick up on any attached explanation, either, so explanations sent with tax returns that aren't asked for or provided on a specific form (such as 8833) tend to get ignored and don't reduce the chance of an inquiry.  Those explanations can help speed up resolution - sometimes - but most of the time they are simply ignored.