401k contributions not deducted

[MariaMc]

Just found out my client should have been reporting his 401k deferrals on his personal tax return, on page 1, line 28. It was never listed on his partnership K-1 until this year (On line 20, Other information) but the cpa preparing the partnership tax returns told me that my client (one of the partners) should have been deducting the 401k contributions on his personal tax return, even though the partnership was submitting the deferrals.

I can amend the prior 2 years for a refund but should I amend years older than that in order to report that a contribution was made, even though he won't receive a refund ? Or I can just amend the prior 2 years and make a note in my file about the nondeducted 401k contributions from the older years so when he takes 401k distributions in the future, I can show some basis that will not be subject to tax?

[Burke]

Any 401k plan contributions should have been shown on the Form 1065 K-1, Box 13, Code R. Apparently, they weren't? The partnership itself does not deduct these. Perhaps you should check with the partnership preparer to make sure these weren't deducted previously by the partnership. If they were, the net income to the partners would have been reduced in those years. (Also, if that happened, the partner would have underpaid his SE taxes). Since the tax returns were prepared incorrectly, I am not sure if that would offer any exceptions in the amendment rules. Anyone know?

[Roland Slugg]

If there were contributions to an IRA or pension plan on behalf of a partner, and the partner's amount was not entered on his K-1 (on line 13, code R, as Burke correctly points out), I would regard that as a serious omission on the part of the partnership and the person who prepared the partnership's tax returns. Your client/partner may wish to consider asking that preparer to reimburse him for: (1) The cost of preparing amended returns for all open years, plus (2) the additional taxes he incurred in each closed year affected by those omissions.

In your post you said the 401(k) contribution amount was entered on Schedule K-1 on line 20 in the most recent year. That's the wrong line, as mentioned above. I wonder what letter code was used.

[MariaMc]

This is what the preparer of the partnership return emailed me. They are a larger midsize CPA firm.


"Technically it is computed and claimed at the individual level based on all of a person’s self-employment income whereas amounts on line 13, code R would be amounts that could just be claimed without limitation.

I haven’t seen this with that code on any K-1 prepared by anyone else in this situation."

Back to my original question, do I really need to amend all the past tax returns ?

[Burke]

1. His answer is a little confusing regarding "without limitation." All self-employment income would be taken into consideration, that is true, but there are annual limits in the Code for the partner's elective deferrals. We don't know what kind of 401k plan this is, (it could be a SIMPLE) and whether the partnership is making matching contributions which may be based on total compensation without limitation, or based on a profit sharing percentage. And he may never have seen it, but the place it should have been shown on the K-1, is Box 13, Code R. How many partners in this partnership? Do they have employees under the 401k plan?

2. There is no exception to filing for refunds after 3 years unless it is a bad debt or worthless securities. So no point to filing an older amended return, but all is probably going to be issued as taxable income by the custodian at the time of withdrawal, as they have no knowledge of whether it was taxed or not. Whether the IRS will accept an 8606 to adjust the non-taxable portion, I do not know. Don't see why not if the TP has his returns for all those years to back it up.