1099-r

[cathe]

Client had a 1099-R in 2009. code in box 7 was LI. My software did not calculate a 10% penalty. Now the IRS wants that penalty. Called the software co. they couldn't get the program to do anything but exempt the penalty. In the 2011 software only an L is allowed in box 7 and it also does not generate the 10% penalty.
So now I am trying to find out if the IRS is entitled to the penalty. The 1099-R instructions state that a deemed loan MAY be subject to the penalty. Can anyone give me any more info on where specifically to get guidance on determining this? I am not great at research. Most of my returns are vanilla and this is definitly pistachio!
This was a 401K distribution in a divorce with a loan on the 401K involved. Taxpayer does not qualify for age exemption to the penalty.

Thanks

Cathe

[RitaB]

Same as distribution

A defaulted 401(k) loan is a distribution. Sounds like your genius client is going to be coughing up some dough. The piper is calling his name. And, if I had a nickel for everytime I had to override my software, I would have several dollars by now.

http://www.guideto401kloans.com/

[taxea]

Most divorce settlements of this type indicate in the court agreement that the funds are paid at the time that the TP/payer retires. You might want to see the document. This TP may have decided on his own to payoff the funds immediately and didn't do it properly.

[Burke]

Sounds like a QDRO to me. Normally, not taxable. But I cannot find any source that will exclude this due to the outstanding loan being deemed a distribution. Whether you can get the 10% penalty waived is another matter. Try using Code 06 and grovel to the IRS.

[veritas]

Box 7

Client had a 1099-R in 2009. code in box 7 was LI. My software did not calculate a 10% penalty. Now the IRS wants that penalty. Called the software co. they couldn't get the program to do anything but exempt the penalty. In the 2011 software only an L is allowed in box 7 and it also does not generate the 10% penalty.
So now I am trying to find out if the IRS is entitled to the penalty. The 1099-R instructions state that a deemed loan MAY be subject to the penalty. Can anyone give me any more info on where specifically to get guidance on determining this? I am not great at research. Most of my returns are vanilla and this is definitly pistachio!
This was a 401K distribution in a divorce with a loan on the 401K involved. Taxpayer does not qualify for age exemption to the penalty.

Thanks

Cathe

Code L and Code 1 are two seperate codes. Your software should have had the capability to enter both codes.

[RitaB]

Oops

your genius client

Should have read the whole thing. The genius is the ex-spouse. Maybe your client can get some help on the penalty, after all.