1099 code 4 | Ed Slott and Company, LLC

1099 code 4

I have a client that has received a notice from the IRS that they owe a significant amount of tax for 2017. Here is the situation:

Mr. Smith owned a Traditional IRA using a variable annuity and named his wife as beneficiary. Mr. Smith died and on the claim form, Mrs. Smith elected deferral of the payout. Mrs. Smith shortly after decided to transfer the funds from the annuity company to an Investment company as Custodian for a Traditional IRA in her name. She submits the transfer paperwork and the annuity company obliges and sends the funds directly to the new Trustee (made payable to the new Trustee) and it was deposited well within 60 days.

Annuity company issued the 1099 with a code 4 for death distribution shows the full amount as taxable to Mrs. Smith. The company will not issue the 1099 any other way. It should have been claimed and spousal continuation and then transferred, but that's water under the bridge at this point. Any thoughts or options for the best way to handle?

  • There should never have been a 1099R since the funds were transferred via a non reportable Trustee to trustee transfer. Good chance that the new IRA custodian did not issue a 5498 reporting a rollover contribution either since they received the funds by direct transfer, and the IRS would then not have a 5498 match for this incorrectly issued 1099R.  The client must now report a spousal rollover on Form 1040, and should collect documentation to corroborate it should the IRS ask her a couple years down the road. The copies should include any distribution statement from the insurance company showing the date of distribution and a copy of the IRA statement for the new custodian showing receipt of either a transfer or rollover contribution with a date within 60 days of the distribution. She should also have a copy of the transfer paperwork she submitted in the first place. Should the client have previously USED her one rollover allowed within the 12 months prior to this transfer, that creates another issue. Please advise if that is the case.
  • Another issue is any beneficiary RMD that would have been due for 2017 that was not taken. It is not clear whether such an RMD was due from this info. If so, the 1099R would be looked at by the IRS as a distribution including an RMD amount which is not eligible for rollover. Under IRS Regs. if a spouse does a spousal rollover in any year after the year of death, she is treated as having owned the IRA for the entire year, and any RMD for that year is based on her age and the Uniform table. She could roll over any amount received that was more than the RMD with the Uniform table. 
  • What did she report on her 2018 return, or did she ignore the 1099R?

 

 

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