Dealing with Form 1099R Code P

[FEDUKE404]

A client has a 2011 Form 1099-R with distribution codes J and P in box 7.

I fully understand the logic, i.e. client contributed funds into Roth IRA during calendar year 2010 and then removed the offending funds (+ taxable earnings) in early calendar year 2011, i.e. once I had started work on the 2010 tax returns.

Question #1: From a procedural perspective (IRS rules) what kind of hoops do I need to jump through to report that income? (I assume an amended 2010 return is necessary per Code P?) Need to use Form 8606 and/or Form 5329??

Question #2: How do I browbeat my tax software into coming up with the correct answer...after dust has settled the earnings (only) will be...potentially...taxable? BTW: Client is one of those "not overly organized" types.

Question #3: I am aware there will, by IRS rules, be 2010 income for this scenario. What happens to the earnings from 01/01/2011 through the date of withdrawal sometime in late March of 2011? (Or, were there "technically" none in the first place, again by IRS rules?) Will this routine be repeated next year? (At least client now knows to WAIT until tax return is prepared before funding Roth IRA.)

Suggestions, especially along the lines of "I've faced this before and I solved it by......" are sought.

(I think March Madness is affecting more than my basketball activities....)

FE

[taxea]

Does the 1099 R show taxable earnings? Codes J and P tell the IRS that the amount reported on the 1099 was for ROTH IRA funds removed from the account and that they were a return of contributed funds. There should be no taxable amount unless the TP is subject to penalty for contributing the funds in the first place.

[FEDUKE404]

Explanation

Does the 1099 R show taxable earnings? Codes J and P tell the IRS that the amount reported on the 1099 was for ROTH IRA funds removed from the account and that they were a return of contributed funds. There should be no taxable amount unless the TP is subject to penalty for contributing the funds in the first place.

The client contributed the full (allowable) amount of $6k in early 2010.

Once the 2010 income tax return was being prepared in the spring of 2011, the client could no longer contribute $6k. (A contribution of slightly more than $5k was allowable once MAGI was determined.)

Client then asked for $1k of the original 2010 contribution to be removed, and later received proceeds of ~$1300. The difference is the earnings those specific (removed) funds made during the period from January 2010 through March 2011.

Yes, the 2011 Form 1099-R does show ~$300 in Box 2a, along with ~$1300 in Box 1 and codes J/P both present. The dollar difference between Box 1 and Box 2a is exactly $1,000.00 which represents the amount of the original contribution that was requested to be withdrawn.

FE

[FEDUKE404]

What about 1040X with no change?

I had hoped to get some more comments, alas....

After doing the necessary number-crunching, there will be no taxable event as a result of the excess funds placed into/removed from the Roth IRA in a timely manner. (Simplest explanation - sufficient funds had been in Roth IRA since around 2004.)

HOWEVER.....

A Form 8606 (Part IV) does get generated and the amount of the withdrawal does show up on line 15a of 2010 Form 1040. Line 15b, of course, is zero. These changes occur with the inclusion of the information shown on the 2011 Form 1099R.

Everyone agrees there is no additional income tax liability with the situation at hand.

So....do I need to file an amended 2010 Form 1040X (showing the addition of Form 8606 and the "new" potentially taxable income - Form 1099R shows such!) or do nothing and react only if the IRS comes calling?? In other words, is knowledge of innocence OK or is proof to the IRS of the same innocence required? NOTE: There is a 2011 Form 1099-R, with Codes J and P, rattling around out there.

FWIW: I'm leaning very heavily to filing a 2010 Form 1040X to show the changes.

Thanks.

FE

[taxea]

If the original return was incorrect then it is best to correct it before the IRS comes calling and wasting everyones time by having to explain the issue at a later date.

[FEDUKE404]

Reporting is the issue here

If the original return was incorrect then it is best to correct it before the IRS comes calling and wasting everyones time by having to explain the issue at a later date.

Ah...the original return WAS correct until new facts for calendar year 2010 emerged in early 2012 from an overcontribution corrected during the spring of 2011.

And per your earlier post, there is no "taxable" income but there is now additional income REPORTED as taxable via the 2011 Form 1099-R.

FE