Deemed distribution

[dmb]

During 1999 the owner of an S-corp withdrew money from his profit sharing account. Thus a prohibitive transaction. He also returned the money by the end of 1999. The plan is now under IRS audit for 1999. The agent told us that Form 5330 would need to be completed to pay the penalty tax and also Form 1099-R for the deemed distribution, which is fine. He also implied that the employer would have to re-do his 1999 Form 1040 to include the distributed amount as income. If he is paying taxes on the deemed distribution from the 1099, does it seem right that he would have to re-do his 1040 and pay as taxable income again??

[MGB]

You do not "pay taxes" with the 1099, you only report income. You pay taxes with the 1040. The agent is completely right.

[dmb]

I guess i didn't ask the right question. If the prohibited transaction was corrected during the year (the money was returned to the plan), should the employer be required to report the amount as income on his Form 1040?? Thanks.