Whenever you get money from a pension, a profit-sharing plan, an insurance contract, an annuity, or a retirement plan, you need a Form 1099-R for your taxes. Reporting income from a 1099-R is not optional; the IRS does get a record of it from plan managers and expects you to account for it on your taxes. If you forget or neglect to declare this transaction, the IRS will correct your return for you and possibly impose sanctions.
Who Prepares 1099-R
If you have to send an 1099-R, it will be in one of those telltale white envelopes that show up in your mailbox in January. The account manager sends you the 1099-R, which identifies the payer and payee (you), the amount of the distribution, the taxable amount, the capital gain (if any) on the withdrawal, deductions, and any state or federal tax withheld.
Reporting the 1099-R
The law says account managers must report all distributions to the IRS, so there's not much chance of the tax folks overlooking your 1099-R payout. However, there's no need for you to send a copy of the 1099-R with your tax return unless you've had federal tax withheld from the distribution. Otherwise, the 1099-R is just an informational document you should always keep safe in the folder with your other tax forms and financial records.
Failure to Declare
The IRS will send you a friendly reminder if you don't report a 1099-R distribution, and might ask for a copy of the document. They'll refigure your taxes for you and charge more for taxable income or capital gains. If there's any penalty due for an early distribution, that goes on the bill along with some IRS penalties and interest thrown in for the late payment. You have the right to appeal an IRS finding within 30 days of receipt. You'll have to call or write and explain why you think they're wrong, and submit any documents to prove your story. The IRS will probably disagree, and if you fail to pay the tax they claim is due, they'll send along a Notice of Intent to Levy (meaning, garnish your wages or seize your property). IRS debts are legal and binding, and you can't get rid of them in bankruptcy. Further, if the agency finds you deliberately withheld information, it can pursue you for tax evasion -- that's a federal crime.
Let's say you've already filed your 1040, you just forgot about the 1099-R, and now want to make amends. Your best option is to file a Form 1040X, an amended tax return, for the year in which you received the distribution. You have to file amended returns within three years from the date the original return was due, or within two years of the date any tax was due, whichever is later. You need to send a signed copy of the 1040X -- they won't accept amended returns electronically -- and a copy of the 1099-R. You don't get any break on the taxes; the IRS will charge interest and penalties each month until you've paid up.
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