IRA early distribution

[ILLMAS]

I had a TP go with someone else to finalize their tax return, he called me back to let me know the other tax preparer was able to reduce his liability by only making a certain portion of a IRA distribution taxable. TP took out about 210K (early distribution) form his IRA account, he had them withheld the 10% for the penalty, box 2a (Taxable Amount) is zero and box 2b is checked off (Taxable amount not determined). According to what I see, the total amount should be taxable, if there was an amount on box 2a, then the difference between box 1 and box 2a is what would be taxable. Can someone please let me know if this is possible, or what basis is used to determine what portion of the IRA is non-taxable, I am afraid that once the IRS sees the attached 1099-R will right away know 100% is taxable. Your thoughts??

Thanks

[mcb39]

What code is in box 7 for the distribution. In my experience, it is almost certain to be taxable unless the code is other than (1)........

[rfassett]

I believe there are only two things that will affect the "taxable amount". First would be a rollover of a portion of the distribution. And we all know that has to be done within 60-days of the distribution. Second is any non-deductible contributions that may have been made. The box being checked "taxable amount not determined" simply means the custodian could not determine if there had been any previouly taxed contributions. I don't think the IRS looking at the 1099 transcript will set off any bells because the 1099 is telling them that it is up to the taxpayer to determine the taxable amount. If there is ever a question, ie audit, however, the taxpayer better be able to prove that he had made non-deductible contributions. And those really should have been reported on the 8606.

[ILLMAS]

1=early distribution

[ILLMAS]

I believe there are only two things that will affect the "taxable amount". First would be a rollover of a portion of the distribution. And we all know that has to be done within 60-days of the distribution. Second is any non-deductible contributions that may have been made. The box being checked "taxable amount not determined" simply means the custodian could not determine if there had been any previouly taxed contributions. I don't think the IRS looking at the 1099 transcript will set off any bells because the 1099 is telling them that it is up to the taxpayer to determine the taxable amount. If there is ever a question, ie audit, however, the taxpayer better be able to prove that he had made non-deductible contributions. And those really should have been reported on the 8606.

No, no rollover, we called the broker to confirm if there was any rollover because TP didn't remember if he had returned some money back. And TP hasn't made any contributions in many years, for the last couple of years he has pretty much took out all his and his wife IRA to buy real estate.

[mcb39]

The number 1 on the 1099 will (or should) eventually trigger a CP from the IRS. The taxpayer had better be able to prove that part of the distribution was not taxable and unless he kept track with the filing of the 8606, it will be pretty unlikely that he can do that. IMO

[ILLMAS]

The number 1 on the 1099 will (or should) eventually trigger a CP from the IRS. The taxpayer had better be able to prove that part of the distribution was not taxable and unless he kept track with the filing of the 8606, it will be pretty unlikely that he can do that. IMO

Amen to that!!!

[JohnH]

Knowing what you now know about this tax return, have you considered how you're going to handle things if the client wants to come back and have you prepare their return next year?

[joanmcq]

Ok, first of all there WILL be a CP notice. and with a 210k early distribution, hoo-wee! can we say penalties & interest???

Second, the only reduction I can see is if they they qualifed for one of the exceptions to the penalty, like higher education expenses. With 210k, I really can't see medical being available. Medical insurance paid while unemployed? Rolled over to another IRA, like maybe one of those idiotic self-directed IRAs?

With a balance that high, the IRA had to have contained some rolled over contributions from another retirement plan. A pension where taxable amounts had been contributed? The preparer would have had to get some pretty detailed basis calculations for that one. Non-deductible contributions from way, way back?

BTW, all IRA 1099-Rs will be 'taxable amount not determined'. The custodian has no way of knowing if a contribution was deducted or not, and therefore if there is any basis. It is up to the taxpayer to keep track of basis and file the 8606s.