1099R for 2020 RMD that was put back

[ETax847]

Client took his RMD in 2020 and then deposited it back before the deadline.  However, the 1099R shows the full amount as taxable with code 7 (normal distribution).  Is anyone familiar with how this should be reported in the tax software so the RMD is not taxable to the client?

[ETax847]

I see the amount that was returned on Form 5498, but I am curious of how to report the returned amount in the tax software.

[Margaret CPA in OH]

Scroll down on the 1099R entry form.  The first box relates to the CARES Act.  It looks as if you could put in zero with the checked box.  See if that results in nothing taxable.

[Max W]

You have to report the amount on the 1099-R, then offset it as an Adjustment to Income

If the the 1099R is not reported, the client will receive a CP2000 and then the transactions will have to be documented.  

[ETax847]

One thought I had was to adjust the taxable amount on the 1099R input to reflect the amount returned.  Would that still trigger a CP2000?

[Margaret CPA in OH]

7 minutes ago, ETax847 said:

One thought I had was to adjust the taxable amount on the 1099R input to reflect the amount returned.  Would that still trigger a CP2000?

Did you try the solution I posted on Friday?  I did on a client and it did exactly what you are asking to do.  Maybe you, too, could try this.  Could it trigger an audit?  Who knows for sure but it seems obvious to me that this is the solution desired by IRS and implemented by the software. 

[ETax847]

Margaret, I see what you are referring to, but it was a regular RMD not a CARES Act distribution.  Handling it like this would trigger a notice for the IRS, which is what I am trying to avoid.  

[ETax847]

On 1/30/2021 at 6:44 PM, Max W said:

You have to report the amount on the 1099-R, then offset it as an Adjustment to Income

If the the 1099R is not reported, the client will receive a CP2000 and then the transactions will have to be documented.  

Max, where did you read to treat it as such? I'd love to be able to share with my client some reference material so he knows why I handled it the way I did.

[Margaret CPA in OH]

3 hours ago, ETax847 said:

Margaret, I see what you are referring to, but it was a regular RMD not a CARES Act distribution.  Handling it like this would trigger a notice for the IRS, which is what I am trying to avoid.  

Sorry, I thought part of the CARES Act was a provision that distributions to some date could be redeposited.  I have not read the whole thing, however, but seem to recall that situation arising early after the act passed.  A client asked about doing it but decided to just keep the funds instead.  I might try doing some more research in case another client did just that.

 

[Gail in Virginia]

I think that Margaret is correct - part of the act allowed people who had already taken their RMD until August 31 to recontribute their RMD back to the same plan or roll it over into another plan.  I think this was covered in Notice 2020-51 but I don't see offhand the specifics for how to show it on the return. 

[JoeFreitag]

It's a tax free repayment. From what I've read and what my software provider has said to do is claim you did an IRA rollover eliminating the distribution. Enter the amount as rolled over that they repaid. The way they distribute IRA rollovers to the client and then they forward it to the custodian -  it's common to have a 1099-R which was actually rolled into another IRA.

[Max W]

33 minutes ago, JoeFreitag said:

It's a tax free repayment. From what I've read and what my software provider has said to do is claim you did an IRA rollover eliminating the distribution. Enter the amount as rolled over that they repaid. The way they distribute IRA rollovers to the client and then they forward it to the custodian -  it's common to have a 1099-R which was actually rolled into another IRA.

I think this is a recipe for a 100% chance of an audit.  You would be changing the the Code from 1 to G and you would be changing the taxable income (not the distribution) to zero.   This would not match the information reported to the IRS.

An adjustment to income as an offset to the 1099R is far more likely to avoid scrutiny.  

[JoeFreitag]

2 minutes ago, Max W said:

I think this is a recipe for a 100% chance of an audit.  You would be changing the the Code from 1 to G and you would be changing the taxable income (not the distribution) to zero.   This would not match the information reported to the IRS.

An adjustment to income as an offset to the 1099R is far more likely to avoid scrutiny.  

That is literally not the case. You don't have to change the code to be an indirect rollover. As I wrote, that's a very common occurance.

[RBowersea]

The proper handling of this situation is to fill out the 1099R input with the distribution in box 1, the taxable amount in box 2a, and enter the rollover taxable amount in 2b.  It is reported as if the taxpayer did a 60-day rollover.  On the explanation tab, I state this was rolled over before August 31 per regulations issued under the Cares Act.

That will show the distribution correctly on the tax return and prevent any future notices.