Averting Problems in This Year’s 1099-Rs

Retirees need to pay careful attention when completing their 2009 tax returns. Some changes in the forms and in the financial services industry could cause confusion and mistakes in your return. The mistakes could cause the IRS to contact you in a few months and maybe result in penalties and interest.

Financial industry upheaval. Many firms disappeared over the last few years through either failure or merger. Most people wait for their 1098 and 1099 forms to come in from their financial firms, pile them up, and enter them on their tax returns. This year, take some additional pre-cautions. Be sure you received a form from each firm where you have an account or loan. Compare what you received to what you listed on your 2008 return. And check to see if mergers caused you to receive duplicate forms from both the old and new firms.

Also, don’t forget that many firms now are phasing out paper returns. You may have forgotten that you elected a paperless option or may have done so inadvertently. If you don’t have a 1099 from an account, check the firm’s web site to see if your form is online.

Retirement accounts. The IRS changed some of the instructions to issuers of Form 1099-R, so the reports you receive on pensions, annuities, IRAs, and other retirement accounts could be different from what you’re used to.

Issuers of 1099-Rs are told that box 2a should be left blank when reporting distributions from a traditional or SEP IRA, and in box 2B “Taxable amount not determined” should be checked. This is different from last year. You may think, quite logically, that when box 2a is blank, the amount in Box 1 (gross amount distributed for the year) is not taxable. But it simply means the form issuer doesn’t know whether or not the distribution is taxable. You have to make the decision and report the taxable amount.

IRA rollovers also are more likely to result in mistakes by either you or the form issuer.

You know whether the rollover is taxable. The issuer doesn’t. The best solution is to report on line 15a of Form 1040 the total amount of the distribution reported on the 1099. Then, on line 15b write “rollover” or whatever else makes the rollover nontaxable.

When you did a rollover by taking possession of the funds and personally rolling them over to a different IRA or qualified plan, the form issuer is likely to put a 1 in box 7, which stands for “Early distribution, no known exception.” To keep from receiving a letter from the IRS asking you to explain why the amount was not reported on your tax return, you should complete Form 5329 as part of your return. On line 2 of this form, enter a 12, telling the IRS you did a valid rollover.

You may receive a 1099-R if you took an RMD in early 2009 before RMDs were suspended. If you rolled the RMD back to the IRA as the IRS allowed, report the distribution on line 15a, and then report none of it as taxable on 15b.

The 1099-R is not designed to handle charitable contributions directly from an IRA to a charity by those older than age 70½. The IRA sponsor will send you a 1099-R reporting this as a distribution. You can’t ignore the 1099-R. List total distributions in box 15a. Report on 15b only the amount of distributions for the year that are taxable. Next to box 15b write “QCD” for qualified charitable distribution. There’s no way to handle this issue on an electronically filed return, so you probably should file a paper return to avoid problems.

April 2010. RW