Odd 1099-R Situation - Underpayment

[Guest lvegas]

Here's a twist on a regular theme here: plan thought it had been paying a surviving spouse her entire QJSA during a number of prior tax years, but actually was paying only a portion, say 90%. However, the plan reported the amounts on 1099-R as though entire QJSA amounts were properly paid. In later tax year, plan discovers mistake and issues a check for amounts previously reported on 1099-R, but which weren't actually paid (the 10%). Must this lump sum "retro" amount be reported on 1099-R for the year in which it is made?

My thought is no -- the make-up amount relates to distributions that although never paid, presumably were previously taken into income by the spouse based on 1099-R reporting. I think Rev. Rul. 2002-84 supports this approach in indicating that if a participant is having his benefits offset to recoup an overpayment made in a prior tax year, the recouped amount is not income to the extent the participant reported the overpayment in income in such prior year.

Any dissent?

[Bird]

I would do it as you suggest. I guess the technically correct fix would be to re-do the prior 1099s and then report the (extra) amount for the current year, but that's such a headache (for the spouse moreso than for the plan) that it just ain't right.

[GBurns]

My interpretation is that the 1099-Rs were correct, it was the payments that were incorrect. I read it to be that the person was short paid, they got 90% of what they should have been paid, but the 1099-R shows the 100%. In other words the 1099-Rs showed more than was actually paid.

If this is so, then there would be no corrections to 1099-Rs because the amounts would be the same as before.

The extra 10% is due to this person as a short payment that was already reported in previous years. and no further reporting should be made.

I cannot even think of how this could even be reported without causing major problems for everyone including the Plan for misreporting. There is also the question of how many years back this goes relative to the statutes of limitation.

[Appleby]

From experience with handling reporting for RMDs SEPPs and distributions in general, it seems that the reporting that was done is incorrect and needs to be corrected, because it did not reflect the amount distributed. I recall one instance where the financial institution failed to distribute SEPP amount for one month. The IRS instructions to the tax-payer was to distribute the amount the following year and include it in income for that year. But then, I am no expert…

[GBurns]

This personal analogy might help explain my logic.

Years ago I worked as a Sales Rep for a company. When I toook my annual 2 weeks vacation in October/November I went and worked with a competitor who had been trying to recruit me. My work there was just to see what their Field Training and Product Training was like. I was not going to actively market, provide leads or even any competitive information. There was no conflict, in fact I learned more than I gave and was free to tell any and everything to my employer.

I left on Tuesday of the second week. But on the Friday a customer had come into the showroom and a Technician and the Receptionist were trying to help him, but since they were doing a terrible job I intervened. It turns out that he came back with his check and bought what I had suggested. Also 1 of the Sales Reps credited me with having closed a sale for him. I was not informed and never asked.

The next year I got a 1099 from that company. I pointed out that I never received any money and was told that a check had been issued. It turned out that the Branch Manager had forgotten to tell anyone and the check was still in his desk drawer. Since it was now stale dated the company issued a new check of course in this new year.

Eventually that tax year was audited by the IRS. The sole reason was that I had not reported that amount on that year's return. I had made a note, provided a copy of my request for a corrected 1099 etc and had reported the amount in the subsequent year since that was when I had constructive receipt of the money.

The IRS view was that the 1099 was correct, the distribution was not. So the correction must be to the distribution not the 1099. I have seen a few similar cases since and all were treated the same, Tax Court included.

This case seems to be factually no different.

Appleby's case does not seem to have had a 1099 issued for an amount that differs from the actual amount distributed.