Forgotten 1099

[Guest Twinky]

We took over a plan. There was a distribution for a terminated participant. We weren't aware of the distribution (timing) and thought the prior TPA would have taken care of it, but they didn't. When doing the year end valuation, we found the distribution. We prepared the 5500. The client now received a letter from the IRS stating they owe the withholding (and that there was no 1099 prepared). How do we correct this?

Thank you so much!

[Ron Snyder]

Have the client pay the withholding and file a 1099. Hope for the best.

[Blinky the 3-eyed Fish]

What triggered a notice from the IRS?

[Guest Twinky]

I'm not sure what triggered the notice from the IRS. That is a very good question.

[Guest Pensions in Paradise]

Are you sure withholding wasn't done? My spidey-senses tell me this might be a case where the withholding was applied to the employer's EIN by mistake. So when the plan filed Form 945 the IRS issued a notice saying that withholding had not been done.

[Guest mjb]

What section of the IRC is cited for the liability of the client for the tax that is not withheld? Under IRC 3402(d) the employer is liable for wage withholding (which includes withholding on pension payments under IRC 3405) which were not withheld only if the employee fails to pay the tax. (Interest and penalites are still due). Otherwise the employee will receive a windfall as a refund for overpayment of the tax by the plan. Need to ask IRS if employee paid taxes. The client needs to consult a tax advisor before paying the tax.

[Guest Twinky]

I have received a copy of the letter. It was due to a discrepancy in the withholding they (IRS) received. Therefore, they did indeed receive the tax withholding on the distribution, but do not have a 1099 to tie it out to (assumption), so they are refunding (not owing, as the client said) the withholding.

Should I tell the client to call the name and number given on the letter and explain that a 1099 was not issued, but that the withholding is correct, and a 1099 will need to be issued?

Thank you everyone for all your help!

[Bird]

they are refunding (not owing, as the client said)

Minor detail.

You probably need to get a Form 945 in to the IRS to reconcile the withholding. I would have the client call to at least try to get the refund stopped. Also, as suggested, do a 1099-R now. Good luck and be prepared for some headaches.

[Guest Newbie1]

A very similar situation happened to us with a client this year. Our client's CPA was supposed to be handling the 1099 reporting but after receving a similar letter from the IRS and researching the situation, we found out that the filing had never been done. After a LONG chat with the IRS we were able (don't ask me how) to get them to revert the tax withholding deposit to the correct EIN# over the phone (thus eliminating the "refund"). The IRS then told us to IMMEDIATELY issue the 1099 and 945 filing.

I guess the only down side is for the participant who filed their taxes months ago.