Disabled

[RNuse09]

I have a client who owed 19,000 from a 10% penalty on an early distribution. She aslo had other errors becasue she cam in with an irs notice showing the differences in what was reported and what was shown on the return. She filed for disability in 2007 and was just granted it. There is a notice from social security saying that she has been disabled since 2007. I want to amend her 2009 return so she does not owe the 19,000. Would you use the numbers that the irs is reporting to do the amended return. I hate to have to take their word for the numbers but she has horrible records. I wan't to simply amend the return with their numbers and getting rid of the 10% penalty. Is this a good idea?

[oceanlovin'ea]

If you have a letter from the IRS already, I don't think you can do an amended return. I just had a client that got a letter from the IRS. He did have the additional income they said but he also had left off a couple of things on his Schedule A (real estate taxes). The lady I talked to at the IRS said to fax them the corrected forms along with a cover letter. They said to mark the page of the letter from IRS that he did not completely agree with the changes. I send a copy of the corrected forms that were affected by the changes.

So far we have just got a letter back that said they received his correspondence and would be back in touch in 60 days.

Linda, EA

[FEDUKE404]

Don't forget

If I read the original post correctly, there is the chance of a HUGE Social Security payment total for the current year as the retroactive amounts would be included along with the 2010 amounts.

(The age of the client and whether Soc Sec has previouly been received is not available.)

While there are several ways to deal with such payments (hope you have good software!) it is quite possible the income amounts, regardless of anything else omitted, could be an issue for the tax returns (including pre-2009) that can be amended and/or challenged.

This means you could have a lot of off-season tax work ahead of you....

FE

[erchess]

Agree, different experience, and agree

I totally agree with Linda that you want to contact the IRS person behind the letter as your first step in resolving this. Where I differ with Linda is that more than once I have been told to amend the return, sometimes starting with the numbers on the original return and sometimes starting with the numbers in the notice. Naturally when you amend the return you send in the 1040X and every Form or Schedule that is changed in your amend.

I also agree with Feduke that I hope your software makes the Social Security Lump Sum calculations easy if you have the relevant prior year returns. If you don't have such software I would consider an upgrade NOW.

If you don't have all the prior year returns you need, you can get them quickly from E Services Online if you're registered with them or more slowly from the Practitioner Priority Line which happens to be my choice because there are parts of E Services Online that I refuse to try and cope with.

[RNuse09]

Thanks

I feel that a one time lump some payment from social securtiy would not affect any return except for the upcoming return. I would think that payment would simply be included on the 2011 return. She is a cash bais taxpayer. The only thing that I feel will happen is that the 10% penalty will go away.

[FEDUKE404]

There is more involved

I feel that a one time lump some payment from social securtiy would not affect any return except for the upcoming return. I would think that payment would simply be included on the 2011 return. She is a cash bais taxpayer. The only thing that I feel will happen is that the 10% penalty will go away.

Your logic may be faulty.....

It is extremely likely there will be a taxable event due to the 2011 receipt of the large amount of (including retroactive) Soc Sec benefits.

However, it is quite possible (again, facts are unknown) that such a 2011 tax hit could be diminished (or even eliminated!) by properly allocating the Soc Sec benefits received from each of the tax years to the appropriate year via an amended income tax return for the year(s) involved. Rest assured the Soc Sec folks will at some point provide your client with information as to the dollar amounts for each of the years involved with the initial (catch-up) payment made in 2011.

If the client was already (in the past) receiving Soc Sec benefits and 85% of those benefits were being taxed on the federal return, then going backward will likely have minimal effects. In reality, a higher AGI could conceivably reduce Sch A items (such as medical) so the full effects of using that option need to be considered by you.

Attempts to make the 10% penalty go away because of the recent Soc Sec proceedings constitute only a portion of the tax issues involved here.

FE

[New York Enrolled Agent]

Your logic may be faulty.....

However, it is quite possible (again, facts are unknown) that such a 2011 tax hit could be diminished (or even eliminated!) by properly allocating the Soc Sec benefits received from each of the tax years to the appropriate year via an amended income tax return for the year(s) involved. Rest assured the Soc Sec folks will at some point provide your client with information as to the dollar amounts for each of the years involved with the initial (catch-up) payment made in 2011.

You cannot amend prior year returns when you receive a lump sum Social Security payment even though some of the benefit is attributable to prior years. For cash basis taxpayers, income is generally recognized in the year it is received.

You can make the special election under §86(e) that might reduce the "bite". See publication 915 for details on treating the lump sum.

[FEDUKE404]

Oops

You cannot amend prior year returns when you receive a lump sum Social Security payment even though some of the benefit is attributable to prior years. For cash basis taxpayers, income is generally recognized in the year it is received.

You can make the special election under §86(e) that might reduce the "bite". See publication 915 for details on treating the lump sum.

My bad - I guess I was confusing the prior year "theoretical" taxes versus the prior year "let's amend!" taxes..... Same type of calculations but with a different destination. It has been several years since I actually trudged through such calculations on a client tax return.

So I guess that leaves two things to do here:

1 - Amend only the return where the retirement distribution penalty could be reduced since, as now determined, the taxpayer WAS truly disabled at that time. With (apparently) a $190k taxable distribution I guess you could go looking for other things on that tax return while you are already there.

and

2 - Do the best on the 2011 return, using the relevant worksheets/software for the "prior year" benefits received, to reduce the amount of the total benefits received that will actually be taxable on the current year return. If the client has high income from the relevant years, the alternate calculation may in fact not make any difference on the amount taxable for 2011....

In the interim, I guess it would still be nice if Schedule G was an option?

FE