1099 R Code K7

[Terry D EA]

Client received a 1099R with K7 in box 7. I understand this is a code indicating a distribution of an IRA  etc that doesn't have a FMV. However, the client never received any distribution. The called the broker and were told nothing was distributed. I haven't tried but I am nearly 100% positive if I input this 1099R, it will be included in taxable income. Any suggestions?

 

[Lee B]

The K means it was not a cash distribution.  It sounds like you need more information about the IRA and the kind of assets it held.

"Use Code K to report distributions of IRA assets not having a readily available FMV. These assets may include: • Stock, other ownership interest in a corporation, short- or long-term debt obligations, not readily tradable on an established securities market; • Ownership interest in a limited liability company (LLC), partnership, trust, or similar entity (unless the interest is traded on an established securities market); • Real estate; • Option contracts or similar products not offered for trade on an established option exchange; or • Other asset that does not have a readily available FMV. "

 

 

 

 

[DANRVAN]

2 hours ago, Terry D EA said:

The called the broker and were told nothing was distributed.

Then he needs to ask why a distribution was reported.

[Terry D EA]

17 hours ago, Lee B said:

The K means it was not a cash distribution.  It sounds like you need more information about the IRA and the kind of assets it held.

"Use Code K to report distributions of IRA assets not having a readily available FMV. These assets may include: • Stock, other ownership interest in a corporation, short- or long-term debt obligations, not readily tradable on an established securities market; • Ownership interest in a limited liability company (LLC), partnership, trust, or similar entity (unless the interest is traded on an established securities market); • Real estate; • Option contracts or similar products not offered for trade on an established option exchange; or • Other asset that does not have a readily available FMV. "

 

 

 

 

Thanks Lee for the detail. I was already aware of what you are saying. Box 2a of the 1099R shows the total distribution as taxable with the box checked taxable amount not determined. Box 16 also shows the state distribution. the 1099R certainly looks like a distribution took place. The client wants to three-way me in when they call again. 

[Terry D EA]

15 hours ago, DANRVAN said:

Then he needs to ask why a distribution was reported.

That is the 65k question. I hope this company (Equity Trust Company) is cooperative and will quickly issue a corrected 1099-R

[Lee B]

7 minutes ago, Terry D EA said:

That is the 65k question. I hope this company (Equity Trust Company) is cooperative and will quickly issue a corrected 1099-R

Perhaps the 1099 R is correct?

[Terry D EA]

5 minutes ago, Lee B said:

Perhaps the 1099 R is correct?

Maybe. The box is checked for a IRA/SEP. I think I remember reading that you are using Drake. I have a dummy client (my own and not a test return) and I have entered the 1099R and as I expected the full amount is taxable. But there is a box to check "No distribution received (ignore screen)" on the 1099R input screen, and checking this removes the 1099R from income. Nothing flows to the state either after the box is checked. My concern here is what gets transmitted to the IRS? How will they know that no distribution was received and not issue a CP2000. Maybe a call to Drake to find out what transmits.

I'm in SC and they begin calculating the tax at the federal taxable income. So no concerns there.

[BrewOne]

I have heard of custodians accepting items into an IRA and then deciding they really don't want to deal with them (i.e. real estate).  Maybe something along those lines occurred?

[Terry D EA]

6 minutes ago, BrewOne said:

I have heard of custodians accepting items into an IRA and then deciding they really don't want to deal with them (i.e. real estate).  Maybe something along those lines occurred?

I don't know. As soon as the client calls the custodian, they will three-way me in to get to get the details

[Terry D EA]

1 hour ago, Terry D EA said:

Maybe. The box is checked for a IRA/SEP. I think I remember reading that you are using Drake. I have a dummy client (my own and not a test return) and I have entered the 1099R and as I expected the full amount is taxable. But there is a box to check "No distribution received (ignore screen)" on the 1099R input screen, and checking this removes the 1099R from income. Nothing flows to the state either after the box is checked. My concern here is what gets transmitted to the IRS? How will they know that no distribution was received and not issue a CP2000. Maybe a call to Drake to find out what transmits.

I'm in SC and they begin calculating the tax at the federal taxable income. So no concerns there.

Update, checking the box in Drake " no Distribution Received" doesn't remove the 1099+r from taxable income. In my dummy return I had a bunch of kids as dependents that was reducing the tax to zero. Needless to say, I looked at this too fast. Haven't spoken with the client yet but wanted to post this so I didn't give any false information.

[Terry D EA]

Wanted to give an update on this topic. After working with the client and custodian, the client did request the account in question be closed. While the client still maintains he never received the funds, the custodian did give the date and account the funds were wired to. The funds were wired April 13, 2023 and still do not show in the client's bank account.  I recommended an extension and partial payment as it may take a while to get this figured out. Another twist, the custodian stated the client requested 10% federal tax withholding. That amount does not show on the 1099R. 

Now I don't know if the IRS cares where the funds went or not or if they were ever received. My take is the client is on the hook for the taxes as a distribution to him has taken place.

[Lee B]

Your client should ask for confirmation of the wire transfer.

Perhaps the funds went to an old account of your client?

[BrewOne]

Wow, something is really off here.

If they can show that once they had access to the funds that they rolled them over into an IRA (plus the 10%), they could request a waiver on the 60-day rule.  Assuming they don't want the money.

[jklcpa]

18 hours ago, Terry D EA said:

Wanted to give an update on this topic. After working with the client and custodian, the client did request the account in question be closed. While the client still maintains he never received the funds, the custodian did give the date and account the funds were wired to. The funds were wired April 13, 2023 and still do not show in the client's bank account.  I recommended an extension and partial payment as it may take a while to get this figured out. Another twist, the custodian stated the client requested 10% federal tax withholding. That amount does not show on the 1099R. 

Now I don't know if the IRS cares where the funds went or not or if they were ever received. My take is the client is on the hook for the taxes as a distribution to him has taken place.

Code K indicates noncash distribution, yet custodian is saying "funds" were wired.  How can that be if it was noncash? Also, if noncash, then it is entirely possible that there was no cash that could have been withheld and paid.

Custodian should be able to tell your client exactly what these noncash assets were and where they were distributed to.  I have several client whose brokers invested in PTP partnerships inside IRAs because of ROI and within acceptable risk.  Is it possible your client's transaction involved only a change of account titling to client's personal name and is reported as a distribution?

[BulldogTom]

What Judy says ^^^.   Something doesn't pass the smell test....but I see conspiracies everywhere I look.

Tom
Longview, TX

[Terry D EA]

3 hours ago, jklcpa said:

Code K indicates noncash distribution, yet custodian is saying "funds" were wired.  How can that be if it was noncash? Also, if noncash, then it is entirely possible that there was no cash that could have been withheld and paid.

Custodian should be able to tell your client exactly what these noncash assets were and where they were distributed to.  I have several client whose brokers invested in PTP partnerships inside IRAs because of ROI and within acceptable risk.  Is it possible your client's transaction involved only a change of account titling to client's personal name and is reported as a distribution?

Judy,

 

In my OP I did state the client requested the custodian to close the account and did provide the routing number and bank account number to deposit the funds in. I don't remember saying the distribution was non-cash. Here is section from the IRS code chart from the 1099R instructions. This whole mess is still confusing and we have another meeting Monday with a supervisor of the custodian who supposedly can tell us what is really going on.

"Use Code K to report distributions of IRA assets not having a readily available FMV." Does this mean non-cash?

Use Code K to report distributions of IRA assets not having a readily available FMV. These assets may include: • Stock, other ownership interest in a corporation, short- or long-term debt obligations, not readily tradable on an established securities market; • Ownership interest in a limited liability company (LLC), partnership, trust, or similar entity (unless the interest is traded on an established securities market); • Real estate; • Option contracts or similar products not offered for trade on an established option exchange; or • Other asset that does not have a readily available FMV. 

[Lee B]

That's how I interpreted it when I posted that it meant "noncash" which doesn't match with the wire transfer scenario.

This situation is like wrestling with pig, the pig enjoys it and you end up all muddy.

[jklcpa]

55 minutes ago, Terry D EA said:

Judy,

In my OP I did state the client requested the custodian to close the account and did provide the routing number and bank account number to deposit the funds in. I don't remember saying the distribution was non-cash. Here is section from the IRS code chart from the 1099R instructions. This whole mess is still confusing and we have another meeting Monday with a supervisor of the custodian who supposedly can tell us what is really going on.

"Use Code K to report distributions of IRA assets not having a readily available FMV." Does this mean non-cash?

Use Code K to report distributions of IRA assets not having a readily available FMV. These assets may include: • Stock, other ownership interest in a corporation, short- or long-term debt obligations, not readily tradable on an established securities market; • Ownership interest in a limited liability company (LLC), partnership, trust, or similar entity (unless the interest is traded on an established securities market); • Real estate; • Option contracts or similar products not offered for trade on an established option exchange; or • Other asset that does not have a readily available FMV. 

 

On 2/6/2024 at 7:49 PM, Lee B said:

The K means it was not a cash distribution.  It sounds like you need more information about the IRA and the kind of assets it held.

Well, it was already established earlier in the discussion that the types of assets code "K" is used for are non-cash types and because FMV of cash IS readily determinable.  

As I already said, if only non-cash, there would be no transfer possible into a cash-only type bank account and no possibility of tax withheld or remitted, and that is the reason I speculated that it may be assets distributed in-kind with a change of ownership title.

You already have a meeting set and only the broker, supervisor, or client would be the one(s) to tell you, or provide documentation, what asset(s) were transferred and/or to where.

If something was "distributed" in-kind via name change from IRA ownership to individual, then that will be taxable.  If that is the case, I'd ask how the gross and taxable portions reported on the 1099R were determined.

 

[JohnH]

This MIGHT be a self-directed IRA, and I’ve seen a couple of those who had some very weird transactions reported.  Especially since they were actually self-directed in name only. 

[Terry D EA]

Here is a new twist. The phone meeting with the custodian went absolutely nowhere. The custodian did state these folks sold the asset to themselves. Okay great, the 1099R is checked as an IRA SEP. So, how did that happen? How do you sell yourself an IRA??? We're back at square one because the previous rep for the custodian failed to follow thru and update the contact phone number and the rep today couldn't verify identity because the client couldn't receive a verification on a phone they no longer have. 

[Lee B]

It would seem to me that it's the taxpayer's responsibility to go online and verify that his contact and bank account information is correct.

[jklcpa]

19 hours ago, Terry D EA said:

the previous rep for the custodian failed to follow thru and update the contact phone number and the rep today couldn't verify identity because the client couldn't receive a verification on a phone they no longer have.

Usually company's will have a secondary method of verification, but I guess not in this case.  If client can't update the phone record because the account is now closed, perhaps the custodian will accommodate a request to mail hard copy of documents to the address of record and should work if that address hasn't changed. Client may have to do this in writing if this custodian refuses to listen to that type of request via phone call.  I've had some luck with this method because a scammer doesn't have access if mailing to the original address on file. YMMV.

This may end up on extension, and I think you need to put this back in the taxpayer's court for them to provide the documentation and for them to explain what transpired. The other choice is that the client could accept that the 1099R as presented is correct and file the returns. It can always be amended later.

[Terry D EA]

On 2/13/2024 at 12:05 PM, jklcpa said:

Usually company's will have a secondary method of verification, but I guess not in this case.  If client can't update the phone record because the account is now closed, perhaps the custodian will accommodate a request to mail hard copy of documents to the address of record and should work if that address hasn't changed. Client may have to do this in writing if this custodian refuses to listen to that type of request via phone call.  I've had some luck with this method because a scammer doesn't have access if mailing to the original address on file. YMMV.

This may end up on extension, and I think you need to put this back in the taxpayer's court for them to provide the documentation and for them to explain what transpired. The other choice is that the client could accept that the 1099R as presented is correct and file the returns. It can always be amended later.

Thanks Judy,

I have already done what you are suggesting. I suggested the extension on day 1. The way everything looks the client has to pay the tax. They are working with the custodian again in an attempt to get this figured out. My next conversation with them I will be pushing for either option. They are really nice folks and have just made a mistake somewhere. 

[schirallicpa]

This is like watching soap opera.  Where's the popcorn?

[JohnH]

I’m beginning to wonder whether the client knows more than they are telling you, but they’re already aware that the whole story is going to cost them money and they’re hoping to somehow slide by. 

is it possible this is rental property (or some other business asset) held in a self directed IRA and they titled it back to themselves because it couldn’t self-fund maintenance or repairs?