Software bug: data filed linking betwen 1099R and 1040

[wc158]

there is a Turbotax software bug which mistakenly links 1099R-Line1(gross distrib) into 1040-Line4a(taxable amount), instead of 1040-Line4b(taxable amount) as it should.

Note: In most of 1099R,box-1 and box-2a have the same number/amount so that this bug usually has not been noticed.

[dmertz]

There is no bug.  If the taxable amount of an IRA distribution is less than the full gross amount due to some portion being rolled over, contributed to charity as a qualified charitable deduction, transferred to an HSA or a portion is nontaxable due to having basis in nondeductible traditional IRA contributions, the gross amount is required to be included on line 4a but only the taxable amount is included on line 4b.  Only the taxable amount of this income on line 4b adds to your AGI and affects the rest of your tax return.

[wc158]

dmertz,

thank you for response. What you described is the correct principles the tax forms are designed for. Unfortunately a possible linking bug breaks  the logic process.

Just a simple test can show the case: in Turbotax Deluxe, 1) Go "FORMS"  2) Open/create a form 1099R, (make sure at box 7: sub-box”IRA/SEP/SIMPLE” checked ) then input "4000" to box 1(Gross distribution),and "2000" to box 2a(taxable amount)  3) Then open the form 1040, check the value in box 4b(taxable amount). It should be "2000" not "4000". i.e. 1040 box-4b should be linked to 1099R box-2a, not box-1.

Note: In most of 1099Rs,box-1 and box-2a have the same amount so that this bug usually has not been noticed.

Wc

[dmertz]

TurboTax is behaving correctly.  Except in the case where the Form 1099-R is reporting a return of contribution after the due date of the tax return, the instructions for Form 1099-R require that box 2a of a Form 1099-R with code 1, 2 or 7 in box 7 and the IRA/SEP/SIMPLE have box 2a equal to box 1, so TurboTax properly uses the amount in box 1 to avoid problems with a Form 1099-R where the form has a different amount in box 2a.

You must enter the Form 1099-R as received.  If the taxable amount is less than the amount in box 1 due to having basis in nondeductible traditional IRA contributions, the taxable amount is determined on Form 8606, not on the Form 1099-R.  Be sure to click the Continue button on the page that lists the Forms 1099-R that you have entered and answer any additional questions that TurboTax presents regarding your basis and year-end value in traditional IRAs.

[wc158]

dmertz,

Thanks for your explanation. You are right about the IRS instruction. But my situation cannot be solved by form 8606.

Here is a uncommon case happened to me: When I prepared my 2022 tax return in Feb. 2023, I found that I forgot to take 2022 RMD ($2000) by the end of 2022, and the financial company hosting my IRA account  also forgot to remind me before taking my request for a Roth conversion so that the 1099R of 2022 contained Roth conversion only. After I contacted the company, in March 2023 they did distribute $2000 missing 2022 RMD with a letter confirming this "Adjustment". Also they sent me a corrected version of 2022 1099R including the amount of missing 2022 RMD, and my 2022 tax return was filed on April14, 2023 based on this corrected 1099R .

Now the 2023 1099R bo1 & box2a include the $2000 of “Adjustment” which occurred in 2023 but already paid income tax for 2022. The company declined to issue an amended 1099R, just suggested to modify the amount by myself with explanation and supporting docs. What should I do to avoid double-taxation on this $2000 if not change 1099R box2a?

[dmertz]

The problem is with the Forms 1099-R, not with TurboTax.  It's generally bad practice for the payer to issue a corrected Form 1099-R for a late-taken missed RMD because the tax code requires that distributions are taxable in the year they are actually paid because it causes the exact problem that you are experiencing.  The result manual adjustment to the 2022 Form 1099-R was not accommodated in the automatically generated 2023 Form 1099-R.  (I've seen this same scenario.  The culprit in that case was Capital One Bank.)

What should have happened if the tax code was properly followed is that there should have been no correction to the 2022 Form 1099-R, requiring you to file Form 5329 Part IX requesting a waiver of the penalty for the late-taken RMD.  It would be convenient if the payer would correct the 2023 Form 1099-R to make the corresponding adjustment, but apparently that's not going to happen.

To avoid having to paper-file your 2023 tax return by submitting a substitute form the 2023 Form 1099-R and incurring the inevitable delay in processing, I think I would file your 2023 tax return by including the Form 1099-R as received, then amend your 2022 tax return by submitting a substitute Form 1099-R (Form 4852) to replace the corrected 2022 Form 1099-R, changing amounts in boxes 1 and 2a back to what the original 2022 Form 1099-R showed and including Form 5329 Part IX requesting the waiver of the excess-accumulation penalty on the $2,000 late-taken RMD.  That will remove the $2,000 from your 2022 taxable income and should result in a refund of a few hundred dollars.  The explanation for the substitute form would be that the payer mistakenly altered the 2022 Form 1099-R to include a distribution that actually occurred in 2023 and was reported on the 2023 Form 1099-R.  Moving $2,000 from your 2022 taxable income to your 2023 taxable income hopefully will not have much negative effect on your combined tax liability for the two years.

[wc158]

dmertz,

Thank you so much for a good idea about form 4852.

By the way, I have already filed a form 5329 (to waive penalty for missing 2022RMD) along with 2022 1040 return in April 2023.

Now the company admitted that there is an adjustment for 2022 tax year but declined to issue a corrected 2023 1099R, and just asked me to modify the taxable amount with explanation and supporting docs.

There are two options without filing amended 2022 return to avoid double-taxation:

1. In the 2023 1099R, I manually modify the taxable amount with explanation. Review of Turbotax shows no error.

2. Add 2023 form 4852 to report corrected taxable amount (do I need to delete the 2023 1099R from the company in Turbotax?)

Thanks,

--wc

[dmertz · Accepted solution]

#2 is the method that you are to use to implement #1, so there is really only one option.

When using Form 4852, you enter the Form 1099-R marked as a substitute form instead of entering the form  as provided by the payer.

[wc158]

Hi dmertz,

I'll go for the option using form 4852 as suggested. I think it's the best solution.

Thanks a lot for your patience and great idea!

Wc

[wc158]

Hi dmertz,

I did add the form 4852  from the "Forms"view in Turbotax. Then open it and mark as as substitute 1099R, but this form not allow me to type-in any amount into line(gross distribution) (Taxable amount)? Does the original 1099R need to be deleted?

[dmertz]

Do not make entries in Forms mode.  Make the entries in step-by-step mode where there is a checkbox to indicate that you are entering a substitute Form.  Delete the original Form 1099-R because the substitute replaces it.

[wc158]

Hi dmertz,

Thank you very mush! Job well done!

wc