1099-R 945 and withholding not done?

[Lou S.]

OK so small client had one tiny $500 distribution that they were supposed to send $400 to part and $100 to feds. They were just going to send $100 with 945 on the under $2,500 exemption. Staff person (now gone, isn't that always the case?) accidentially sent full $500 to part.

Is the correct thing to do still send in the $100 with the 945, show the withholding on the 1099-R and request the $100 pack from the part? That seems like the way to do it but wanted to know if anyone else has run into this before.

[Bird]

No, just report what actually happened with $0 withholding. There is a requirement to withhold, but the consequences aren't that dire - the participant would have to initiate some action to ask the trustee to submit the required withholding, and the trustee would say "sure, just as soon as you return the overpayment." I don't believe the 1099/945 side of the IRS does any enforcement of the mandatory WH rules - they couldn't, really, not enough info.

[Lou S.]

While I realize the likelyhood of getting caught is nearly non-existant I was still under the impression that

Failure to withhold, deposit, or pay taxesIf you do not withhold income, social security, or Medicare taxes from employees, or if you withhold taxes but do not deposit them or pay them to the IRS, you may be subject to a penalty of the unpaid tax, plus interest. You may also be subject to penalties if you deposit the taxes late. For more information, see Publication 15.

Fell under this rule and the Plan Adminstrator (the client) is still responsible for the unpaid taxes they were supposed to withhold but did not.

I was trying to findout what the actual penalties are though and must admit I'm coming up blank despite going through the penalty section of Pub 15 (circular E).

[TPAMan]

If you withhold and fail to deposit, that is a big deal!

If you fail to withhold, a problem doesn't typcially surface until the taxpayer fails to pay the taxes owed on the distribution. Could happen I suppose, but pretty unlikely.

Biggest threat is probably a tongue lashing from the IRS/DOL if they ever did an operational audit of the plan.

[Lou S.]

Thanks both of you.

I guess my confussion is where does the mandatory requirement come in if there is no real penalty for failure to comply?

[pmacduff]

Lou - to answer your question, I think it is because the ultimate responsibility for actual reporting of the payout for taxation falls to the participant. The upfront mandatory withholding was instituted back around 1993 (I think) and I believe was set up because so many individuals were not reporting taxable distributions, Uncle Sam was losing out!!

I agree with others that there might be a tongue lashing or hand slap for the Plan if the problem was found, but again it is the participant who is responsible for proper reporting and payment of the appropriate taxes on the distribution.

My vote is to do the 1099-R as the payout was done. We have had clients proceed in this manner and never had any backlash. That being said, I do think that if you were talking about a much larger distribution and or tax amount, then I might have to rethink my position....

[Bird]

Just for the record, mandatory withholding was instituted to offset some other, unrelated budget expense or revenue decrease - by instituting WH in the year of payment, the government was able to recognize additional projected revenue for that year (instead of the following year when it would have otherwise been paid when participants filed their 1040s - so it was really just shifting money forward one year). Kind of, ah, quaint, I guess, considering that it was probably on the magnitude of a few billion and we are now running a deficit of 1.4 trillion and it's not getting a whole lot of attention.

I don't think there was a problem of participants not voluntarily reporting distributions because 1099s were being issued, even in those dark ages.

[ESOP Guy]

This discusion isn't very old. But we had a small client pay a little over $1k with no withholding. It is a Dr. office is this is the first payment since the mid-2000s.

As far as I can tell the client isn't at much risk as seems to be the concensus in the thread. But if someone knows of anything else we need to know about I wouldn't mind a heads up.

We are planning preparing the 1099-R as the distribution was done show no tax withheld.

As an aside my memory is the same as Bird's. These rules were set up to give a one year boost to gov't revenue by taking it from a future year. (Warning ideological soap box coming) One of the reasons our government is so screwed up is because that actuallymakes sense to those people. I swear one of the best changes that could happen is if someone in our political leadershop made Uncle Sam use GAAP. That kind of shift would not change the income statement, just be prepaid revenue on the balance sheet. Enough of my CPA rant.

[Bird]

One of the reasons our government is so screwed up is because that actuallymakes sense to those people. I swear one of the best changes that could happen is if someone in our political leadershop made Uncle Sam use GAAP. That kind of shift would not change the income statement, just be prepaid revenue on the balance sheet. Enough of my CPA rant.

Yup. Not that I have time for this but I saw a letter in the WSJ a couple of days ago that concluded something to the effect of "we need people with new ideas." We don't need new ideas, we just need people with spine to match revenues and spending. There is mass delusion that there is an easy fix to our massive deficit problem, if only someone is brilliant enough to think of it.

[Lou S.]

As an aside my memory is the same as Bird's. These rules were set up to give a one year boost to gov't revenue by taking it from a future year. (Warning ideological soap box coming)

Yeah it was the Unemployment Compensation act of 1992. It was supposedly used to fund additional federal unemployment benefits during that particular recesssion by collecting the taxes sooner.