1099-R Code 1

[Christian]

A client who takes a uniform payout from his IRA account has for two years gotten a Form 1099-R from his fiduciary showing Code 1 in box 7 of the form. When he set up his plan I contacted the brokerage he deals with asking that the code be changed to code 2 which is the correct code for his situation. They refused so each year since he started taking his payment I have attached a Form 5329 indicating the correct code. About two weeks ago he received a notice from the Service stating he may need to file an amended return for 2022 in which they showed a copy of his Form 1099-R for that year. They had made no changes or adjustments to his return and advised he may choose not to file an amended return adding it may mean a possible penalty down the road. The notice further advised that if he wanted to effect a change to the code on his Form 1099-R he needed to contact his fiduciary and request it. He contacted his broker receiving the same negative response. I advised him to call the provided IRS response number and inform the associate that he had called them and told they could not change the code. They did advise that if he received a penalty notice they would handle it. In the meantime I will continue to include the Form 5329 with his annual filing. I find this really strange as a simple call to the broker sending my Form 1099-Rs would have changed it promptly.

[Lee B]

In my experience, not all brokers are knowledgeable. A few years ago I had a client whose broker advised her incorrectly about her RMD.

She didn't really understand so I had to email the broker with a copy of the rules that applied to her situation.

[Christian]

His broker's back office advised his advisor that for legal liability reasons the code could not be changed. Go figure.

[Catherine]

On 1/23/2024 at 4:20 PM, Christian said:

His broker's back office advised his advisor that for legal liability reasons the code could not be changed. Go figure.

I'd get that in writing (email, at least) as proof that the client tried to get the code changed, and the custodian refused to cooperate.

[Slippery Pencil]

The custodian has no way of knowing this is a 72t distribution, thus distribution code 1.  There's no way they're going to change that and they are correct to take that position.  It's the taxpayer's responsibility to fill out and attach the 5329 to indicate that it's a 72t distribution.

[mcbreck]

6 hours ago, Slippery Pencil said:

The custodian has no way of knowing this is a 72t distribution, thus distribution code 1.  There's no way they're going to change that and they are correct to take that position.  It's the taxpayer's responsibility to fill out and attach the 5329 to indicate that it's a 72t distribution.

When the broker set up an IRA distribution request form there would be a checkbox for the 72t distribution. Then the broker enters that when they make the distribution request and that's how the code is entered properly. The custodian has the ability to fix it, it just may take 6 months. Our firm runs a new set of corrected 1099-r forms in July I think. We can also fix a 1099 and change cost basis but it won't run until July.

If the client follows through for all the years, the IRS will be fine with the current method. I don't know all the facts for why the firm is refusing to correct. For example maybe they didn't meet the distribution dollar amount requirement when they took the distribution or maybe they skipped a year in the 5. For example maybe this is year 5, they skipped year 3 and now the client wants a corrected 1099 and that's why the broker refuses.

For example, I had a client several years ago who wanted to retroactively enter into a 72t agreement and his distribution amount wasn't based upon life expectancy. We refused to correct the 1099r.

[Christian]

The client called the Service at the number provided and advised the Service associate he had contacted the fiduciary and requested a change. I expect no change so will continue attaching the Form 5329.