Client dies; beneficiary doesn't notify financial institution holding IRA

[orygun]

Mother dies in 2014; daughter is sole beneficiary of estate and IRA. My client, the daughter, never notified Vanguard that mother had died and that her own RDM should be issued in her name for 2015. Names of both mother and daughter were on checking account so RDM was direct deposited mid-year into daughter's bank account according to mother's request when turned 70.5. Now I am trying to do daughter's taxes and noticed that she has a 1099-R with mother's SSN and withholding sent to IRS under a deceased person's SSN. I have told her to contact Vanguard, fill out appropriate beneficiary forms, and request that they issue a corrected 1099-R in her name. Have any of you had experience with something like this? Are they apt to issue a corrected 1099-R? Or might I have to do an estate return for 2015 with the mother's income and have daughter enclose a form 1310? [There have been no estate returns done and it is almost 2 years since mother died.] If I just claim the income for daughter, credit her for the w/h and attach an explanatory statement, will she hear from the IRS since there is no w/h from Vanguard under her SSN? Thanks for any suggestions!

[kcjenkins]

Certainly she needs to contact Vanguard, both for the future and hopefully to get a corrected 1099-R for this year.  I'd advise trying, as we all know that the IRS seldom actually reads explanations.  

[Abby Normal]

I always have to stop and think whether it's MRD or RMD... I know for sure it's not RDM!

[Abby Normal]

I actually doubt that Vanguard will issue a 1099R for the beneficiary because that isn't what happened. When this happens, it's best to just run it through the estate and pass out the income and withholding to the beneficiaries, attaching a copy of the 1099R to the estate return.

[Abby Normal]

You can't do a 2015 1040 for someone who died in 2014.

[Roberts]

IMO if you report it on the daughters return you will likely hear from the IRS, they aren't going to throw a fit about it when you explain the problem. The kicker is the tax withholding but IMO they'll accept the explanation.

Getting a corrected 1099 is going to take FOREVER.

 

[orygun]

Follow-up question. If I do an estate return as suggested, what do I use for dates? Let's assume mother died June 15, 2014 so first estate return should have covered from then up to June 1, 2015, I believe. No such return was done and as far as I know there was no income then. I'm assuming the 2014 Vanguard RMD (Abby Normal: yes, I'm sorry about the typo in original post, not RDM!] was before her death; I know it was included in 2014 final return. Can I just do an estate return for calendar year 2015 or do I need to do one for the year beginning with DOD in 2014 (with no income) and then another for the next year (beginning June 2015) if that was when RMD was received ?  Supposedly daughter is working with Vanguard...but she has had almost 2 years to deal with this and hasn't!

[Abby Normal]

Yes, the first estate return filed determines the filing year, so if none was filed, choosing a calendar year for 2015 is fine. Mark it first and final. No 2014 return was due because income was below $600.

[jasdlm]

Vanguard won't issue a new 1099 (if they do, someone's a better talker than me).  1041.

[fredazcpa]

yup 1041 pass out the income and the withholdings

 

[kcjenkins]

And do NOT feel bad about charging fairly for the 1041.  It was her fault, not yours, that it became necessary !

[orygun]

I just got off the phone with the IRS. I called the Practitioner Priority Line and, surprisingly, got a fairly quick response. She tried to be helpful and I was on hold twice while she researched but the only thing she could suggest was what I had concluded from your responses: file a 1041. Of course, her only expertise was IRAs so couldn't be of any help with a 1041. I have only done a couple before but think I can muddle through! Thanks for all your input.

[SaraEA]

Withholding taxes cannot be passed through to a beneficiary.  (Estimated taxes may be if a timely election is made, but that's not the case here.)  The estate must file a tax return as a nominee recipient of the distribution issued in the deceased's name.  The refund of withholding will be issued to the estate.  If the estate doesn't have a bank account, the daughter will either have to open one to deposit the refund into or see if Probate will issue a letter authorizing a bank to cash it and give the proceeds to her.

Don't be afraid of the 1041 if all that's on it is the IRA distribution.  You will be able to enter your fees as a deduction even if they aren't paid yet--the law is explicit on this.  The taxable portion of the distribution will pass through to the daughter on a K-1 and she will have to include it on her own tax return.  If she didn't continue with required distributions she will face a 50% penalty on the amount she should have taken out.  It's not hard to ask for a waiver of the penalty.  (I've never once had the IRS refuse.)

[orygun]

Sara, your reply was helpful but I have a follow-up question. On the 1041, the withholding on the IRA (which is fully taxable) will more than cover the estate tax of 15% on the income so there will be a small refund to the estate; daughter is personal rep of estate so she will have to figure how to cash it. (Her problem!)  But my question now is the daughter's return. You said the estate needed to give her a K-1 showing the distribution. If the tax is paid by the estate, why is she going to be taxed again? What am I missing?

[SaraEA]

If it is the final year of the estate (in your case, first and final), all income and expenses are passed through to the beneficiary.  You don't ever want the estate to pay taxes if possible.  The highest rate of something like 40% kicks in at income of only $11k or so.  Your problem is that the withholding can't pass through--it has to be refunded to the estate.  The daughter already received the distribution, so the estate would have to subtract that from its income and end up with no taxable income anyway.  I don't see a way around this except to file an estate return and let the daughter figure out how to cash the check.

 

[orygun]

Thanks again, Sara, for your words of wisdom. Since my previous post, I have done some inputting in my software and realize that the am't of the distribution (about $1,000) minus the $600 exemption and a few legitimate estate expenses leaves me with no taxable income on the 1041.  With that being the case, can I file the 1041 and request a refund of the w/h (c. $200)? Can I file a 1310 to request the refund to go the daughter who is the Personal Representative of the estate; otherwise she can figure out how to get the money transferred from estate to her? Will there be any need for a K-1 to daughter or for her to claim the income on her return if it is all wiped out by the 1041 deductions?

(I have only done 2 other 1041s in my career so am a real novice and really appreciate the help!)

[TAXMAN]

I have a 1099r issued to deceased in 2015 who died in 2014 with FWH on that 1099r in deceased SS#. Are we saying to file a 1041 pass out the income and the wh refund will be issued to the estate. State of VA that did this will not correct or reissue. What if we did a form 4852 substitute for 1099-r showing the income and wh. Will this work?

[Catherine]

9 hours ago, orygun said:

Can I file a 1310 to request the refund to go the daughter who is the Personal Representative of the estate;

Yes but be warned that you will need to paper-file and include copies of death certificate AND assignment of representative/executor/whatever they call it in your state.  AND that it will take extra time to process.  One I did last year took a good six months to get the refund.  It was still easier for the out-of-state daughter of the deceased than to wrangle getting an "estate" bank account set up to receive one payment.  Maybe not quicker -- but easier.