Stupidly missed accounting for the COVID relief as income in years 2021 and 2022. Need to amend but how do I account for the repayment?

[MPBreese]

Messed up and didn't include Cares Act Hardship withdrawal as income for years 2021 and 2022. I will reimburse 3/4 of the money this week (I just discovered my error) . I will go back and amend 2021 and 2022 taxes for the error but how do I account for the repayment I will make in 2023. I plan to repay all but a third of the money withdrawn. If I amend the return for the income error, then how do I reamend it to account for the repayment? Help!!!

[tagteam]

@Critter-3 

[Critter-3 · Accepted solution]

You must first amend the 2020 tax return and then the 2021 and then the 2022 since the repayment is all accounted for on the 2020 return which will then affect the 21 & 22.   But are you making the repayment timely? 

https://www.irs.gov/newsroom/coronavirus-related-relief-for-retirement-plans-and-iras-questions-and-...

Q7. May I repay a coronavirus-related distribution?

A7. In general, yes, you may repay all or part of the amount of a coronavirus-related distribution to an eligible retirement plan, provided that you complete the repayment within three years after the date that the distribution was received. If you repay a coronavirus-related distribution, the distribution will be treated as though it were repaid in a direct trustee-to-trustee transfer so that you do not owe federal income tax on the distribution.

If, for example, you receive a coronavirus-related distribution in 2020, you choose to include the distribution amount in income over a 3-year period (2020, 2021, and 2022), and you choose to repay the full amount to an eligible retirement plan in 2022, you may file amended federal income tax returns for 2020 and 2021 to claim a refund of the tax attributable to the amount of the distribution that you included in income for those years, and you will not be required to include any amount in income in 2022. See sections 4.D, 4.E, and 4.F of Notice 2005-92 for additional examples.

[MPBreese]

I took the distribution out on the 29th of December 2020 and will repay 2/3 of that amount on December 1st of this year. The 2020 tax return was filed correctly with the proper amount listed as income, it was just 2021 and 2022 that I did not report the income. I have already gone in and amended the 2021 and 2022 returns but not the 2020. I thought that after I made the reimbursement, I can then go back and recapture the tax paid in, but do this for the 2021 and 2022 returns, and leave 2020 as it is? If this is the case it would be so much cleaner. Would this be the correct path or should I spread it across the three years and amend the 2020 return as well?

[Critter-3 · Accepted solution]

If you make any repayment in the 3 year period you MUST go back and amend the 2020 return FIRST and then amend the 21 & 22.   The example shows a full repayment in 2022 but you are making a partial repayment in 23 however the rule is still the same ... you MUST amend 2020 first since you are changing the amount you are spreading out over the next 2 tax years.  The amendments you have already done are probably not correct so hopefully you did not mail them in yet.  

Read the rules :  https://www.irs.gov/newsroom/coronavirus-related-relief-for-retirement-plans-and-iras-questions-and-...

Q7. May I repay a coronavirus-related distribution?

A7. In general, yes, you may repay all or part of the amount of a coronavirus-related distribution to an eligible retirement plan, provided that you complete the repayment within three years after the date that the distribution was received. If you repay a coronavirus-related distribution, the distribution will be treated as though it were repaid in a direct trustee-to-trustee transfer so that you do not owe federal income tax on the distribution.

If, for example, you receive a coronavirus-related distribution in 2020, you choose to include the distribution amount in income over a 3-year period (2020, 2021, and 2022), and you choose to repay the full amount to an eligible retirement plan in 2022, you may file amended federal income tax returns for 2020 and 2021 to claim a refund of the tax attributable to the amount of the distribution that you included in income for those years, and you will not be required to include any amount in income in 2022. See sections 4.D, 4.E, and 4.F of Notice 2005-92 for additional examples.