1099R Not Reported On a Loan Default

[Karoline Curran]

I have a client whose assets are in a brokerage account. The owner took a loan and never made payments. They apparently never intended to and now  want it defaulted.  I don't have confidence she is going to have a 1099R produced even though she said that's her intention.  My question is: What are the ramifications/fixes for a defaulted loan on a brokerage account when a 1099R is not done?   We do utilize Penchecks, but that may result in 2 1099Rs. 

Thank you in advance-

[Bill Presson]

1. If your firm has been engaged to prepare 1099s, then you should do so.

2. Even if a 1099 isn't prepared, the participant is responsible for reporting taxable income on their own 1040.

[Karoline Curran]

23 minutes ago, Bill Presson said:

1. If your firm has been engaged to prepare 1099s, then you should do so.

2. Even if a 1099 isn't prepared, the participant is responsible for reporting taxable income on their own 1040.

Are there any ramifications of no 1099R is produced?  Yes, we can do one, but if they actually do one as well, there will be 2. Won't that be an issue?

[401king]

Why would the client prepare a 1099-R for themselves when you prepare 1099-R for the Plan on any other distribution? I would stick to business as normal and prepare the 1099-R. 

If none is produced? Sounds like a pretty big Plan-related problem. 

[Karoline Curran]

12 minutes ago, 401king said:

Why would the client prepare a 1099-R for themselves when you prepare 1099-R for the Plan on any other distribution? I would stick to business as normal and prepare the 1099-R. 

If none is produced? Sounds like a pretty big Plan-related problem. 

Because we do have clients who have their CPAs prepare the 1099Rs.  We don't automatically prepare them  for clients with brokerage accounts -- only if they want us to.  My concern is having 2 1099Rs done.

[Bill Presson]

1 hour ago, Karoline Curran said:

Are there any ramifications of no 1099R is produced?  Yes, we can do one, but if they actually do one as well, there will be 2. Won't that be an issue?

There are financial penalties for not issuing/filing the 1099r. Filing two would also be an issue, so make sure to coordinate that. Maybe get something in writing.

[Bird]

1 hour ago, Karoline Curran said:

Because we do have clients who have their CPAs prepare the 1099Rs.  We don't automatically prepare them  for clients with brokerage accounts -- only if they want us to. 

Not that I would adopt that policy, but I think I'd take the position that we are doing a 1099-R unless someone specifically confirms in writing that they will do it.  (And not the client saying "the CPA will do it.")

[Larry Starr]

5 hours ago, Karoline Curran said:

Because we do have clients who have their CPAs prepare the 1099Rs.  We don't automatically prepare them  for clients with brokerage accounts -- only if they want us to.  My concern is having 2 1099Rs done.

If two 1099Rs are done, then the client will have an issue when he does his 1040.  At that point, he (or his accountant) will ask one of the parties that prepared the 1099 to file an amended 1099 for that reported payout.  That will correct the IRS system.

[Luke Bailey]

Check what your service provider agreement says as to responsibility. You may want to resign from this client.

[David Schultz]

At the risk of being a bit too "geeky" here, it is worth noting that a loan must be "bona fide" to be treated as a loan under IRC §72 (see Treas. Reg. §1-72(p)-1 Q&A 17).  If the business owner took the funds with the intent to not pay them back, then there was no bona fide loan and the plan has an operational failure and a failure to withhold taxes on a distribution.  Given that a HCE/Key EE was the party that took a distribution in violation of the plan's terms (and probably in violation of the 401(k) distribution restrictions), this could be a qualification issue.

[Luke Bailey]

 

3 hours ago, David Schultz said:

At the risk of being a bit too "geeky" here, it is worth noting that a loan must be "bona fide" to be treated as a loan under IRC §72 (see Treas. Reg. §1-72(p)-1 Q&A 17).  If the business owner took the funds with the intent to not pay them back, then there was no bona fide loan and the plan has an operational failure and a failure to withhold taxes on a distribution.  Given that a HCE/Key EE was the party that took a distribution in violation of the plan's terms (and probably in violation of the 401(k) distribution restrictions), this could be a qualification issue.

Good point. I think the rest of us missed it because the original question was about 1099-R reporting.