Lump Sum payment - 100% witholding

[Guest RJM]

Here's the situation: Mr. R gets a mandatory 70.5 distribution. He asked

that we withhold 100% for federal taxes. We did this in December 2003.

In 2004, Mr. R meets with his CPA. He would like to file electronically.

Everything went fine until his return was rejected by the IRS.

Seems you cannot file electronically if you withhold 100% for taxes.

Well, that means that the CPA reworks the return, Mr. R mails the return

and asked for the refund to be deposited ACH into his bank account. No,

that's not an option either. All this seems to be a result of taking the

entire distribution for taxes. We don't understand, Mr. R's CPA doesn't

understand.

It certainly seems to be doing things the hardest way possible. Can anyone

shed any light on this?

[JanetM]

Why didn't someone tell him to take cash and send the amount is as estimated tax payment.

[david rigby]

Why does the plan sponsor care? Who is giving tax advice here?

[Harwood]

My guess is that 100% withholding is a red flag to the IRS. The 1099-R data is entered by the e-filer, be it a tax professional or an individual. The temptation to show 100% withholding must be great.

For many years, one tax scam has been to send in phony paper W-2 forms [or 1099's with withholding] with your 1040 form and then claim a refund for the withholding. The 1040 forms are processed - and refunds issued - long before the IRS has the W-2 forms from the employer entered into the IRS system.

Obviously electronic filing - where you are providing all the wage/compensation/withholding data without even showing the IRS a paper copy of the W-2 - is ripe for fraud. Hence the red flag.