Federal withholding - how to correct?

[SFSD]

In December of 2007, federal tax was withheld in error. It was the participant's intention to roll their entire distribution to an IRA and the mistake was not theirs. Now with the consolidated 945 coming due at the end of the month, we're trying to figure out if there is a way to recover the 2007 withholding. The custodian is stating there is not. The IRS has moderated their position on some items and I'm wondering if this is among them? Any ideas?

[WDIK]

Is there some reason that it is not viable for the participant in question to file his or her personal tax return and receive the refund to which he or she is entitled?

[SFSD]

Is there some reason that it is not viable for the participant in question to file his or her personal tax return and receive the refund to which he or she is entitled?

Depending upon their tax picture, they may or may not be entitled to get all of it back. Also, they will have the 10% penalty for a premature distribution. Most important, they want the roll the money to their IRA. The only way to accomplish this that I can think of so far is to get the funds back in the custodian's hands so a check payable to the participants IRA can be issued.

[rcline46]

Don't forget the 60 day rollover rule. If not beyond 60 days, the participant can deposit the check into their IRA as a rollover, and the taxes withheld from personal assets. There would be no taxes due and no penalty for under 59 1/2.

If they cannot come up with the funds to cover the taxes withheld, then they owe tax and penalties on the 20% withholding only, not the full amount.

[SFSD]

Don't forget the 60 day rollover rule. If not beyond 60 days, the participant can deposit the check into their IRA as a rollover, and the taxes withheld from personal assets. There would be no taxes due and no penalty for under 59 1/2.

If they cannot come up with the funds to cover the taxes withheld, then they owe tax and penalties on the 20% withholding only, not the full amount.

Naturally, they cannot come up with the funds. My thinking is the only way to get this done is by the custodian issuing a second check to the participant's rollover. Otherwise the 60 days will be long past by the time they get their tax refund.

Is there no relief from withholding errors in other than the current tax year?

[jevd]

Don't forget the 60 day rollover rule. If not beyond 60 days, the participant can deposit the check into their IRA as a rollover, and the taxes withheld from personal assets. There would be no taxes due and no penalty for under 59 1/2.

If they cannot come up with the funds to cover the taxes withheld, then they owe tax and penalties on the 20% withholding only, not the full amount.

Naturally, they cannot come up with the funds. My thinking is the only way to get this done is by the custodian issuing a second check to the participant's rollover. Otherwise the 60 days will be long past by the time they get their tax refund.

Is there no relief from withholding errors in other than the current tax year?

The only way I know is to get a short term loan and do it before the 60 Days are up then repay with the tax return to the extent possible. You say they can't come up with the funds. If not their error, then whose. Would the guilty party like to make the loan? Is there a potential suit over the matter? Also there may be an extension of the 60 day period but it would take a PLR if not on the list of automatic exemptions.

[BG5150]

Didn't the person get a check stub or some other correcspondence showing what the withholding was? If so, why wasn't this caught timely?

I'm thinking if he did, the onus was on the participant to get this cleaned up.

[Bird]

I'm thinking that even if the participant got a stub or confirmation the next day that it was too late to do much about getting the money back from the IRS.

The short term loan is the easiest fix. It's not great but beats the alternatives.

[Appleby]

I doubt the custodian can do anything at this point. The withholding amount has already been remitted to the IRS, and the 945 must show the amounts remitted as of year-end.

I agree with the other posters that the short term loan is the solution.

You mention that the individual may not receive the entire amount as a tax-refund. But, technically, he/she should ---either as an actual refund or a reduction in taxes owed. Either way, the net effect is that the amount withheld for taxes will reduce the amount owed to the IRS.

[SFSD]

Thanks to all of you who replied. Finally, I reached a helpful person at the IRS. I learned it is possible to get a refund or tax credit if one has remitted too much withholding to the IRS. This is done on Form 945 when you reconcile what's due versus the amounts paid during the year. Now it's up to the custodian. Unfortunately, the participant doesn't want to go the short-term loan route. Even if they get the tax withheld back when they file their tax return, by then it will be well beyond the 60 days of the original distribution so they won't be able to roll the money.

[Jim Norman]

The IRS has a procedure for this. The plan should pay the full benefit to the participant then file for a refund on the withholding. Here is the IRS procedure, helpfully outlined in a letter IRS sent to PBGC on this.

IRS Letter on Erroneous Withholding Recovery

[SFSD]

Thank you!!!!!!!!!