Advice wanted on Fed Tax situation

[aja8888]

Help!

DW has a small IRA (~$60 K) at Schwab that she takes RMDs from. In February 2020, she took her RMD of $3,000 automatically through Schwab’s auto distribute program. Then, unbeknownst to me, she called Schwab and pulled a second check for the same amount.

A few weeks later, she deposited the first check in the bank. The second check was not cashed and was filed away by her. I was not aware of the second check’s existence at all. Let me say that DW has COPD pretty badly, and is on oxygen full time and takes a dozen meds. I believe she has some memory problems that are getting worse each year. We have agreed that she will sign a POA for me to handle her finances so that I can keep an eye on her accounts going forward.

Well, in August (by chance), I took a look at her IRA statement to see if we needed to make any changes or additions based on what was going on in the market. When I was looking at the transactions, I saw a journal entry for $3,000 deposited. I asked her what this was about and she didn’t know. Then she looked in her files and pulled out the $3,000 check she never cashed. The check expired and Schwab put the money back in the account.

OK, all was good until we got her Schwab 1099 this month and the distribution shows $6,000. We called Schwab and asked if they could issue a corrected 1099 for $3,000 since the check was never cashed. After several hours of call transferring, talking to reps who were clueless, and a second day of trying to get an answer (all reps working from home), we were told “no”, just report whatever you feel like as far as the RMD distribution amount. Not a good answer to me. I filed a written complaint with Schwab.

We were told from the rep who was responding to our complaint that Schwab will be issuing an IRS Form 5498 in May 2021 which reports individual retirement contributions for this account. They will not issue a corrected 1099.

That’s as far as I was able to get from Schwab and I have no way of knowing what they will report on that form or if they will say that the contribution of the $3,000 was for a returned and not cashed check and not an unauthorized contribution.

Does anyone here have any knowledge or suggestions as to how to handle the tax reporting on this distribution? Or have any other suggestions as to what we should do to not pay tax on the $3,000 not cashed?

Thanks, aja8888

BTW, I always do our taxes using TurboTax or H & R Block so I have no CPA or accountant to visit with regarding this situation.



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[copyright1997reloaded]

No real idea, except why couldn't Schwab reissue the $3000 check.

Yes, you would have to claim $6000 in income for 2020, but at least you would have the extra $3000.

I would also go back to Schwab on the complaint (or another) to get clarification on what the Form 5498 will contain.

 

[aja8888]

No real idea, except why couldn't Schwab reissue the $3000 check.

Yes, you would have to claim $6000 in income for 2020, but at least you would have the extra $3000.

I would also go back to Schwab on the complaint (or another) to get clarification on what the Form 5498 will contain.

Thanks for responding.

I asked, they would not reissue the check, only cut another and make another $3,000 taxable.

I have already submitted a request to speak with the "retirement people" but have not been notified. The only way I can get to anyone that has any authority is to email the help desk. This so far has gotten me nowhere or got me to people that have no knowledge.

I am hoping someone with tax prep knowledge will chime in here.

 

[ERD50]

All I can say is, if you enter a different amount than the 1099-R you were issued, I'd expect the IRS computers to kick it out and say you owe.

I had to deal with the IRS for $100 that they said we didn't pay on my MIL's final 1041 for her estate (we did, the check was cashed, but not properly credited to the account - kinda long story). Bottom line, we started getting certified letters that we were delinquent, and call this # of we disagree. Well, you cannot get through to the number. After 90 minutes on hold, they just hang up. Day after day.

Then we start getting the certified letters that they will put liens on our accounts! Over a matter of $100! That we paid!

I finally got through, and got it straightened out. I could give a lot more details, but I'm just saying, you probably want to avoid having to explain anything to the IRS. They keep blaming Covid for the backlog, though other companies seem to have figured out how too deal with it. And if you know you are behind in processing, why not change those letters that go out every 30 days (funny how Covid didn't delay those letters!)?

To keep your blood pressure down, if Schwab won't fix it by the time you need to file, I'd just pay, and try to get them to balance it out for your 2021 taxes.

-ERD50

 

[ivinsfan]

Thanks for responding.

I asked, they would not reissue the check, only cut another and make another $3,000 taxable.

I have already submitted a request to speak with the "retirement people" but have not been notified. The only way I can get to anyone that has any authority is to email the help desk. This so far has gotten me nowhere or got me to people that have no knowledge.

I am hoping someone with tax prep knowledge will chime in here.

I'm not sure how tax prep knowledge will help you here. Although your DW got confused and didn't cash the check she can't be the only person that ever did this. It's a Schwab issue and hopefully they will fix it quickly. The money is back in your DW account so in theory it's like the transaction never happened. Hope they fix it for you. You'll have to just wait it out, good luck.

 

[aja8888]

All I can say is, if you enter a different amount than the 1099-R you were issued, I'd expect the IRS computers to kick it out and say you owe.

I had to deal with the IRS for $100 that they said we didn't pay on my MIL's final 1041 for her estate (we did, the check was cashed, but not properly credited to the account - kinda long story). Bottom line, we started getting certified letters that we were delinquent, and call this # of we disagree. Well, you cannot get through to the number. After 90 minutes on hold, they just hang up. Day after day.

Then we start getting the certified letters that they will put liens on our accounts! Over a matter of $100! That we paid!

I finally got through, and got it straightened out. I could give a lot more details, but I'm just saying, you probably want to avoid having to explain anything to the IRS. They keep blaming Covid for the backlog, though other companies seem to have figured out how too deal with it. And if you know you are behind in processing, why not change those letters that go out every 30 days (funny how Covid didn't delay those letters!)?

To keep your blood pressure down, if Schwab won't fix it by the time you need to file, I'd just pay, and try to get them to balance it out for your 2021 taxes.

-ERD50

Yeah, I'll just pay the taxes on the distribution and will have to deal with the 5498 later. But Schwab has been no help.

I'm not sure how tax prep knowledge will help you here. Although your DW got confused and didn't cash the check she can't be the only person that ever did this. It's a Schwab issue and hopefully they will fix it quickly. The money is back in your DW account so in theory it's like the transaction never happened. Hope they fix it for you. You'll have to just wait it out, good luck.

Thanks, I'm more pissed at Schwab than I can stand right now. It's like they just blew us off. I have had my IRA, Roth and brokerage accounts with them for 37 years.

 

[Montecfo]

I would report the the 6000 and record a negative $3000 adjustment to net the $3000.

I'd have to go into TT to tell you how I would do it, but that is what I would do.

 

[Bamaman]

This is not a normal year with the pandemic. In a normal year, I'd call and make an appointment to see an IRS answer person in the flesh. If they couldn't help you, they'd know who could tell you who could help.

We live in a middle size town, and the IRS office is approachable. I wouldn't suggest this in a very large city. Note: I don't know if they are or aren't seeing people in person at this time. Their reps are always behind bullet proof glass with a security guard on the door.

 

[pb4uski]

https://www.irs.gov/taxtopics/tc154

If your Form W-2, Wage and Tax Statement and/or Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. aren't available to you by February 1, 2021, or if your information is incorrect on these forms, contact your employer/payer. If you still haven't received the missing or corrected form by the end of February, you may call the IRS at 800-829-1040 for assistance (see Telephone and Local Assistance for hours of operation). When you call, please have the following information available:

Your name, address (including ZIP code), phone number, taxpayer identification number, and dates of employment,
Your employer/payer's name, address (including ZIP code), and phone number,
If known, your employer/payer's identification number.
The IRS will contact the employer/payer for you and request the missing or corrected form. The IRS will also send you a Form 4852, Substitute for Form W-2, Wage and Tax Statement, or Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., along with a letter containing instructions for you.

If you don't receive the missing or corrected form in sufficient time to file your tax return, you may use Form 4852 to complete your return. Estimate your wages or the payments made to you and any taxes withheld and report them on Form 4852.

If you receive the missing or corrected Form W-2 or Form 1099-R after you file your return and the information differs from your estimates, you must file Form 1040-X, Amended U.S. Individual Income Tax Return. For additional information on filing an amended return, see Topic No. 308 and Should I File an Amended Return?

 

[pb4uski]

You might be able to enter the 1099-R and a Form 4852 to show the correct amount, though I think that you may not be able to file electronically. In that case I might just file the 1099-R with the $3,000 and wait for them to ask about it and explain it.

Unless the IRS can convince the payer to send you a corrected 1099 under the procedure in the prior post, you might get some sort of inquiry and have to explain it and prove documentation showing the activity in the IRA and where the issuer cancelled the check and put it back in the IRA.

 

[aja8888]

You might be able to enter the 1099-R and a Form 4852 to show the correct amount, though I think that you may not be able to file electronically. In that case I might just file the 1099-R with the $3,000 and wait for them to ask about it and explain it.

Unless the IRS can convince the payer to send you a corrected 1099 under the procedure in the prior post, you might get some sort of inquiry and have to explain it and prove documentation showing the activity in the IRA and where the issuer cancelled the check and put it back in the IRA.

Thanks, PB, for the link on the issue.

I have already called the IRS on this and they are not in a position to assist by calling Schwab due to being backlogged for a couple of years according to the rep I spoke with. The IRS is not seeing any taxpayer in person these days unless it's an appeal on a fine or some other payment matter. And that may take a year or so to get scheduled (or more). They also had 11 million pieces of mail yet to open from the pandemic backlog. Rep said see a CPA or call Schwab, of which I had no help from. CPA will just do what I am doing.

I guess I'll just report the $6K and pay the additional tax and be done with it until I get a letter for an unauthorized contribution to her IRA. I do have the statement showing the funds were redeposited and can deal with that a few years out. Maybe we will be dead by then (we are in our late 70's now)...who knows?

To show everyone how messed up the IRS is, I have a continuing story. In 2017 (April), I filed a Final Return for a Solo 401K I had for a few years. No tax due, just a return to indicate there will be no more contributions and the plan was terminated. This was a two page return mailed in. I mailed it certified, return receipt as I do all mailings to the IRS.

In May of 2019, two years later, I received a letter from the IRS saying I did not file a Final Return for the Solo 401k. So I sent them a letter with the copy of the return I filed. Well, another year passed and in May of 2020, I got another letter, this one saying there is no record of my return on file. So I resent the return with copies of both IRS letters, and the supporting return receipt documentation indicating they received the original return and the copy sent a year ago.

I then received a letter and a fine in June 2020, so I called them, only to get someone working from home. I explained the whole business of mailings and the rep said send another letter. ? Ok, so I did. In January of this year, I received a notice that said they can't talk to me unless I "authorize" myself to be able to communicate with them. Very strange letter and it looked like a computer generated one.

Once again I called them and got a live person who was actually in the Ogden, Utah office where I have been sending these letters. I asked about the mailings over the two year period on this situation and he said there is no record in the computer that had those documents. What??

Where we are with that mess is back to letter writing and this time I faxed them a copy. The rep, who was trying to be helpful, said to me that there are rooms full of unopened mail in the Ogden, Utah office that no one knows when it will be gone through. My two years worth of mailings are probably sitting in those piles. He did say the faxed document I sent will get some attention, but he had no estimate of when.

This is why I really don't want to stir up another letter writing campaign with the IRS anytime soon.

 

[target2019]

As described it sounds like Schwab, IRS and you are correct.
Two RMDs were requested. Now you have to deal with the IRA which is unfortunate. Your not the first to encounter the problem, so searching tax software forums will likely give you a few ideas on how to handle this. But as you mentioned, it might generate another exchange between you and IRS.
I would look at 1099 worksheet boxes that allow a balancing of 3K, with an explanation. The other option is what you're intending to do. Use the 6K figure this year, wait for the 5498, and either amend or wait til next year.
I've been in a similar position and understand the desire to avoid IRS contact.

 

[Jerry1]

I would report the the 6000 and record a negative $3000 adjustment to net the $3000.

I'd have to go into TT to tell you how I would do it, but that is what I would do.

Agree. You should report the correct number. Here’s something I got from Motley Fool (so I didn’t have to type it).

Disputing an incorrect 1099
If the issuer of an erroneous 1099 refuses to correct its mistake, you'll need to include an explanation on your tax return and attach documentation in support of your assertion. Let's say you receive a 1099 showing you were paid $20,000 from a given company, when in reality you were only paid $15,000. You can't just list that $15,000 on your tax return and call it a day, because the IRS will notice the discrepancy and most likely go after you for the difference. At the same time, you shouldn't simply pay taxes on an extra $5,000 you never received.

Instead, what you'll need to do is list the $15,000 but attach a statement explaining the overpayment. That statement should include documentation in support of your claim, such as copies of canceled checks and invoices. You should also include proof that you attempted to reach the issuer, and that the issuer either failed to respond or refused to comply.

While the latter steps clearly require a bit of extra legwork, you'll need to take them if you want to avoid getting audited or improperly taxed. Unfortunately, when it comes to 1099s, mistakes do happen, but if you don't address them, you'll be the one who ultimately loses out.

***********

Personally, I’d stay on Schwab to get this corrected, but if I was in a hurry to file my taxes, I’d file correctly and include an explanation. Biggest issue with that is that then you’re filing hard copy (not e-filing) which is not good if you’re looking for a refund.

 

[SecondCor521]

If the timing in the OP is accurate, there may be a much easier way to handle all of this due to the CARES Act and subsequent legislation.

The CARES Act suspended all RMDs for 2020. Subsequent legislation allowed individuals who had already taken RMDs to redeposit those RMDs back into their IRAs by 8/31/2020. These redeposits would be treated as a rollover for tax purposes, with the additional benefit that the "rollovers" were not subject to the one rollover per 12 month period rule.

So if I were in OP's shoes, I would treat the second $3K as an RMD that was made in February then redeposited by 8/31. For tax purposes, then, the $6K would be reported as a distribution on the 1099-R, but the taxable amount should be reduced to $3K. If there is an option to indicate in the tax program you're using that the other $3K was a rollover, I would do that; the word "ROLLOVER" may show up on line 4b. You should end up with $6K on line 4a of the tax return and $3K on line 4b of the tax return (plus any other IRA distributions that you may have taken from your own IRAs, of course).

This would save you the uphill battle of trying to get a corrected 1099-R, which I doubt you'd be able to do. It also will perfectly match things up for the IRS.

Since they say they are sending you a Form 5498 in May, that would be the proper thing for them to do if they are treating it as a rollover contribution. The 5498 would have the $3K in box 2 of that form. But they might also code it as a regular contribution and put the amount in box 1, which is not what you'd want in this scenario. I'd probably call them now and see if they can confirm that they are treating it as a rollover contribution and not a regular contribution, and if not, ask them to do so given the circumstances. Once you receive it you would want to file it for your records with your 2020 tax paperwork.

...

If you were a "qualified individual" subject to the CARES Act, you could also treat it as a coronavirus-related distribution and repayment on Form 8915-E. It's a similar but more complicated path, so I don't know why you would take it, but I mention it for completeness' sake.

...

Also, really disappointing customer service from Schwab. When my son had a thing that he had to handle with his (excess contribution, IIRC), we went into the local Schwab office, which seemed to be helpful for explaining the situation and getting it fixed. We did have to involve the branch manager, but the problem did get fixed appropriately. If you have a local Schwab office I'd suggest considering an in person visit.

 

[Mark1]

Agree. You should report the correct number. Here’s something I got from Motley Fool (so I didn’t have to type it).

Disputing an incorrect 1099
If the issuer of an erroneous 1099 refuses to correct its mistake, you'll need to include an explanation on your tax return and attach documentation in support of your assertion. Let's say you receive a 1099 showing you were paid $20,000 from a given company, when in reality you were only paid $15,000. You can't just list that $15,000 on your tax return and call it a day, because the IRS will notice the discrepancy and most likely go after you for the difference. At the same time, you shouldn't simply pay taxes on an extra $5,000 you never received.

Instead, what you'll need to do is list the $15,000 but attach a statement explaining the overpayment. That statement should include documentation in support of your claim, such as copies of canceled checks and invoices. You should also include proof that you attempted to reach the issuer, and that the issuer either failed to respond or refused to comply.

While the latter steps clearly require a bit of extra legwork, you'll need to take them if you want to avoid getting audited or improperly taxed. Unfortunately, when it comes to 1099s, mistakes do happen, but if you don't address them, you'll be the one who ultimately loses out.

***********

Personally, I’d stay on Schwab to get this corrected, but if I was in a hurry to file my taxes, I’d file correctly and include an explanation. Biggest issue with that is that then you’re filing hard copy (not e-filing) which is not good if you’re looking for a refund.

+1 Maybe I'm naive, but I still believe being fact based, honest, and just trying to do the right thing is always the simplest approach and your best bet.

 

[Gill]

I would show the $3,000 returned to the account as a rollover. Problem solved.
Gill

 

[Ready]

I’m dealing with a similar situation with Fidelity. They issued me a 1099 showing a $20K distribution that I never received. They are unwilling to fix it. So my plan is to report the 1099 but show it as non-taxable (disputing what the 1099 shows) and write a letter explaining the situation, and including the backup and copies of communication between Fidelity and my employer showing my attempts to rectify the situation.

I have no idea if it will work but I’m not sure what else can be done.

 

[Gill]

I’m dealing with a similar situation with Fidelity. They issued me a 1099 showing a $20K distribution that I never received. They are unwilling to fix it. So my plan is to report the 1099 but show it as non-taxable (disputing what the 1099 shows) and write a letter explaining the situation, and including the backup and copies of communication between Fidelity and my employer showing my attempts to rectify the situation.

I have no idea if it will work but I’m not sure what else can be done.

You'll be getting yourself in a mess doing what you describe. Treat it as a rollover as I explained above and you'll be fine.
Gill

 

[Ready]

You'll be getting yourself in a mess doing what you describe. Treat it as a rollover as I explained above and you'll be fine.
Gill

I’m not sure I understand what to enter into TurboTax to reflect this. Right now my 1099 shows a $20K distribution, with all $20K taxable. How would I enter this as a rollover?

 

[Alan]

I would show the $3,000 returned to the account as a rollover. Problem solved.
Gill

I agree. I believe that TurboTax will ask you what you did with the $6,000 withdrawal reported on the 1099-R and you can respond with $3,000 cashed out and $3,000 rolled into an IRA which should be a non-taxable move.

 

[braumeister]

I agree. I believe that TurboTax will ask you what you did with the $6,000 withdrawal reported on the 1099-R and you can respond with $3,000 cashed out and $3,000 rolled into an IRA which should be a non-taxable move.

Yes, this is routine.
Early last year I took my RMD for the year and not long thereafter they removed the RMD requirement for 2020. A phone call to Fidelity got it put back into the TIRA.

When doing my taxes in TT, I just told it that the amount was a rollover to the TIRA. Although the total distribution amount shown on the 1099-R included it, I just subtracted out that amount. which is shown on Line 2 of the 5498 form (and called a rollover contribution).

 

[Ready]

Yes, this is routine.
Early last year I took my RMD for the year and not long thereafter they removed the RMD requirement for 2020. A phone call to Fidelity got it put back into the TIRA.

When doing my taxes in TT, I just told it that the amount was a rollover to the TIRA. Although the total distribution amount shown on the 1099-R included it, I just subtracted out that amount. which is shown on Line 2 of the 5498 form (and called a rollover contribution).

I'm looking at Turbotax now and it's not asking me what I did with the money. It just says "enter the information exactly as it appears on your 1099-R. When I enter it with box 2a including the amount as taxable it just considers it a distribution and assesses the tax on it. What am I missing?

 

[braumeister]

I'm looking at Turbotax now and it's not asking me what I did with the money. It just says "enter the information exactly as it appears on your 1099-R. When I enter it with box 2a including the amount as taxable it just considers it a distribution and assesses the tax on it. What am I missing?

Keep going. It should ask you in the next screen or two.

 

[Gill]

I’m not sure I understand what to enter into TurboTax to reflect this. Right now my 1099 shows a $20K distribution, with all $20K taxable. How would I enter this as a rollover?

As Alan indicates above, Turbotax asks what you did with the distribution and you simply respond with the amount you returned to the IRA.
Gill

 

[Gill]

Keep going. It should ask you in the next screen or two.

Correct. Keep going to the next screens.
Gill