Will the IRS accept my paper trail showing I distributed my brothers' portions of my decreased dad's IRA to them, though I am sole beneficiary & the 1099 comes to me?

[cricketluu]

I plan to send the IRS a statement signed by my brothers saying they'll be responsible for taxes on their portions, copies of the checks I wrote for their shares, their SS #s and a letter of explanation. My dad died before his living trust could be made beneficiary of the IRA, leaving me as sole beneficiary.

[ChristinaS · Accepted solution]

First off, my condolences for your loss.

As far as your question....Probably not, sorry to say. If the 1099-R is issued entirely to you, then the IRS will consider the tax burden your burden. While it certainly makes sense to share with your siblings, that doesn't mean the IRS considers this income to be split for tax purposes.

Sharing your income with others doesn't mean you get to reflect that on your tax returns.

Did you receive advice suggesting that this approach had merit? If so, what provision of the tax code did the person reference? Any advice accepted regarding this should include clear references to the law and be provided by a qualified tax professional or attorney. There is no commonly accepted method to allocate out income to individuals who were not actual beneficiaries.

If you argued that you were not sole beneficiary at the time of probate, perhaps the account could have been split at that time. (though haven't personally heard of that happening if you are named sole bene on the account docs)

[dmertz]

As TurboTaxChristinaS indicated, this is entirely taxable to you.  Any amounts that you gave to others are gifts from you to them.  If the amount you gifted to any one person exceeds that annual gift-tax exclusion amount for 2016 of $14,000, you must file Form 709 to report the gift.

What people often do in this situation is reduce the amount of the gift to each person by the amount of tax liability incurred on that portion of the distribution from the IRA.  This allows those to whom you gift these amounts to effectively share the tax burden.

[ChristinaS]

Good advice, DMertz. Cricketluu, just remember that this is entirely "off tax return". But what you can do is back-out the amount you gave to a sibling from your 1099-R. Notate your federal (and state) refund or amount due. Then put it back. Present the change as an amount to your siblings as what they owe you to cover the tax burden. Assuming you discussed "distributing" with your brothers, you can tell them now that you will need to do it this way instead. They should understand.

[cricketluu]

Wow! Thanks for the great replies (and your condolences, TTChrstinaS.) I had been thinking along these lines as an alternative, so have not distributed my brothers' entire shares yet. I did run this by a tax attorney at rocketlawyer. While he said he thought it would fly, I've been feeling unsettled about it and now I know why - he didn't site any provision of the tax code, so I wasn't at all convinced and have been feeling nervous about it. Now I get to decide whether to seek out a different tax attorney, or just gift the money and withhold the taxes. All of these replies are very helpful. Thank you again.

[ChristinaS]

Glad to hear you found the advice helpful, as you voted down my response! I generally leave room for doubt in my replies, since taxes are complicated, but I am pretty sure there is simply no alternative other than claiming the income (which is legally only yours, it seems) and just resolving the tax part on your own. Also, depending on the amounts, there could be the gift tax part too. It doesn't mean you owe gift tax, but you may have an additional tax filing requirement, Best of luck.

[dmertz]

The only way that you could have avoided all of this being taxable to you would have been to execute a qualified disclaimer on a portion of the IRA and allow that portion to go to contingent beneficiaries, which may or may not produce a better tax result or may have ended up with a different split of the money among your brothers.  However, since you have received the distribution from the IRA, a disclaimer is no longer possible.

[cricketluu]

Oh my, I didn't mean to vote down your answer! My device wouldn't let me read the other comments after I voted it up, so I unvoted it, or so I thought. I'll fix that!

I spoke with a CPA who has done nothing but taxes for many years and she had good news: I declare the amount on the 1099s, then deduct the amount I sent my brothers under Other Losses, putting their Soc Sec numbers on the line next to the amount. She said the firm she has been with for 20 years has advised this over and over and it has never been a problem. I will also attach all the documentation I referred to in my original post. She says I should be golden.

[dmertz]

"We've been doing this for years and have never had a problem" doesn't make it proper.  This can proper for other types of Forms 1099 when the form is issued to only one of an number of joint owners and the recipient must nominee a portion of the income to other joint owners, but there is no joint owner here.  This is entirely your income due to being the only listed beneficiary.  Except when the courts intervene to reform a beneficiary designation post-death, or you execute a qualified disclaimer (which is not possible if you have already received the distribution or you have missed the deadline), there is no legal way to cause this to be income to anyone but you.