Form 1099R Reported Incorrectly For Years

[geekgirldany]

New client. Started working on the tax return and noticed the pension she receives has not been reported correctly on previous tax returns. I would say more than 10 years. It has "unknown" in Box 2a. and the pension has not been taxed on the tax return. She does owe a few thousand on Federal.

Of course I will be preparing the tax return correctly but I want to prepare her for IRS notices.

My question is once I file this return will that more than likely trigger the IRS to look at her prior years tax returns and assess tax owed?
I've never really seen this so would appreciate any help.

[Rapid Robert]

My question is once I file this return will that more than likely trigger the IRS to look at her prior years tax returns and assess tax owed?

Maybe, maybe not (although I doubt it will). But what difference does it make? No matter what answer you get here, what choice do you or the taxpayer have? You have a Circ 230 obligation (if you are covered) to inform the client of the error in prior years and consequences of not fixing it, at least for the open years. If client is honest, they will choose to amend and pay the tax, penalties, and interest. Maybe the prior preparer if there was one should be accountable for penalties.

[ATSMAN]

Maybe, maybe not (although I doubt it will). But what difference does it make? No matter what answer you get here, what choice do you or the taxpayer have? You have a Circ 230 obligation (if you are covered) to inform the client of the error in prior years and consequences of not fixing it, at least for the open years. If client is honest, they will choose to amend and pay the tax, penalties, and interest. Maybe the prior preparer if there was one should be accountable for penalties.

My suggestion is that you put in writing your professional advice that she should amend the open years. It is CYA for you.

It is up to the taxpayer if they want to amend prior years, but the way IRS is going if you are the gambler type, you may want to roll the dice and just do it correctly for 2017!

If they have not scored this return for CP2000 in 10 years it is highly unlikely it is setting off the red flags!

[geekgirldany]

Thank you all for taking the time to post.

I have already spoken to the client about the situation. I told her that 2016 needs to be amended. If prior years are the same, which she seems to think so, then they also need to be amended.
These are self prepared returns. I did tell her to let me find out how likely/quickly the IRS might go back and look at prior years returns to give her the time to prepare to amend and pay.
This is a Government pension... CSA I believe is the form side note. I've got several of these clients with the same thing "unknown". I am so surprised that it has not been picked out by the IRS sooner.

Thank you all again.

[Rapid Robert]

This is a Government pension... CSA I believe is the form side note. I've got several of these clients with the same thing "unknown". I am so surprised that it has not been picked out by the IRS sooner.

I used to see a few of these CSA 1099s (which not that many years ago followed their own weird box numbering system, but nowadays seem to conform more to standard 1099-R format), but not any in a while. As I recall it is possible for there to be basis in the annuity/pension, but I don't think it's usually going to be anywhere near 100%. Also possible all the basis has already been received, so ongoing payments might be 100% taxable. Ask taxpayer if they have records such as the 1099s for all the years in question.

[geekgirldany]

She is actually receiving a survivor pension... so her husband's pension. I did a search on the forum and looked at the OPM site. More than likely the basis was used up by her husband. She looked through all the 1099-Rs (she only has the one each year) and they all say unknown in the box. It is also my thinking that there would be a figure in Box 9 for employee contributions. Not sure how it got to be non taxable through the online self prepared software like you said FedDuke it has a selection for that kind of form. I remember using the simplified method. The very few that used it did out live the exclusion. That has been awhile back that I used it.

[ATSMAN]

Unless you have access to prior returns, don't assume that the basis was used up. I have seen many tax returns involving OPM 1099-R where the taxpayer or the preparer had no clue how to recapture the basis. As you know only a portion of the basis is deducted each year.

[Burke]

Exclusion of part of the TP's basis has been the rule for quite a long time in annuity and pension payments. I forget when it began, but years ago you used to be able to recapture the entire basis within the first 3 years. Does the TP know when her husband first began receiving this pension? It would be a rare case where the wife would not know his age when he first began receiving it, so it can be tracked back. And I am willing to bet the CSA can tell her what the employee's contribution was at commencement. My software has a worksheet for Simplified Pension treatment which tracks this from year to year with all that information on it and I try to print that worksheet for inclusion in the client's tax package. If there is a new preparer the next year, they can pick up just where the prior year left off. And I have had to calculate a few myself.

[peggysioux]

1099r

Was the deceased spouse of the taxpayer possibly a public safety officer who death was in the line of duty? If that is the case, the Bureau of Justice Assistance provides a tax-free death benefit to eligible survivors of public safety officers.

Peggy Sioux

[JohnH]

This is from Publication 939.
It explains the General Rule vs the Simplified method.
They key element was the retirement starting date and the election the taxpayer made in the first year.

>>>>>>>

This publication gives you the information you need to determine the tax treatment of your pension and annuity income under the General Rule. Generally, each of your monthly annuity payments is made up of two parts: the tax-free part that is a return of your net cost, and the taxable balance.

What is the General Rule.
The General Rule is one of the two methods used to figure the tax-free part of each annuity payment based on the ratio of your investment in the contract to the total expected return. The other method is the Simplified Method, which is discussed in Publication 575, Pension and Annuity Income.

Who must use the General Rule.
Use this publication if you receive pension or annuity payments from:

1.A nonqualified plan (for example, a private annuity, a purchased commercial annuity, or a nonqualified employee plan),

2. A qualified plan if:

a.Your annuity starting date is before November 19, 1996 (and after July 1, 1986), and you do not qualify to use, or did not choose to use, the Simplified Method, or

b.Your annuity starting date is after November 18, 1996, and as of that date you are age 75 or over and the annuity payments are guaranteed for at least 5 years.
<<<<<<

[taxea]

I would determine what years are still open for SOL purposes then advise the TP that these should be amended (starting with the oldest going forward to current year). At the very least the last 6 years should be amended and filed.

[JohnH]

Why would you advise amending the last 6 years when the SOL is 3 years?

[mastertaxguy]

Wait a second...

Original post stated the "It has "unknown" in Box 2a. and the pension has not been taxed on the tax return." Only conclusion can be post is referring to 1099R form(s) as "it". Also I gather the prior year returns were filed joint.

In the software we use, if form 1099R box 1 has an amount and box 2a is blank, the box 1 amount is carried to line 16a and 16b shows the same amount as taxable regardless of checking the "taxable amount undetermined" box on the 1099R data entry screen (box 12a and 12b for form 1040A). If we enter a different amount in box 2a that amount is carried to line 16b. If we check (toggle) the "taxable amount undetermined" box our software (current version-Drake) is still carrying the box 1 amount to line 16a.

The post doesn't say the actual prior year returns were obtained and reviewed, nor does it indicate IRS transcripts confirm the belief that the box 1 amounts were not reported as taxable or were not adjusted by IRS and taxed. It is probable that if, in fact, box 16a had an amount and box 16b improperly reported ZERO or a different amount that at some point IRS "adjusted" the return(s) perhaps without the surviving spouse's knowledge.

Perhaps it would be best for the practitioner, with signed POA forms from the taxpayer, to contact PPS and request return and/or wage/earning transcripts for the past several years and then determine what, if any, amendments are needed?

[geekgirldany]

This OPA 1099-R has a Code 7.... I will double check her husband is dead. Really she told me he was but better make sure they may be divorced. I will be seeing the client tomorrow and discussing more. I know 2016 tax return is not correct and was not MFJ. Previous years are being reviewed by the client. She said that more than likely they were the same. Just going by her word will have to review the tax returns.

On the SOL, it can be extended to 6 years if there is substantial omission of gross income... more than 25% I believe. So this very well may fall into that.

[JohnH]

Yes, the SOL can be extended to 6 years by IRS if they wish to do so. But I can't think of many situations in which I would advise a client to amend beyond the 3 year SOL. Certainly not in this one. If the criteria are met AND if IRS wants to reach farther back, that's their call. It definitely isn't the preparer's responsibility to advise the client to do that.