Amend 2020 for Coronavirus Relief?

[Hoosier]

New client self-prepared 2020 tax returns and brings me IRS letter CP2000 for 2020 1099-R, early distribution from 401k. Client failed to include any information from the 1099-R on the 2020 form 1040 and the result is the distribution being added to income, the 10% early withdrawal penalty and a hefty substantial tax understatement penalty. It is my understanding that the coronavirus relief using form 8915-E for 2020 is not an available solution due to the client's failure to claim on his original tax filing. As a result, it appears that he cannot amend the 2020 tax return to include the 2020 form 8915-E and that he cannot eliminate the 10% early distribution penalty. Have any preparers encountered this situation and if so, do you concur with this analysis?

[Rapid Robert]

I am aware that there is some IRS reg that says an election to not spread the coronavirus-related distribution (CRD) over 3 years is irrevocable, but it does not say that in the law itself. My anecdote is that a client's original timely filed, self-prepared return for 2020 did indeed report the entire distribution (about $7K) as taxable in the current year (no penalty, taxpayer over age 59.5), with no Form 8615-E (because H&R Block online did not support that form at the software tier the taxpayer was willing to pay for). In late October 2021, I efiled an amended return with the 8615-E form claiming the 3-year spread, it was accepted by both IRS and California FTB and refunds were issued (the CA refund was issued promptly, the IRS refund took a number of months). The refunds were due partly to the reduction in taxable income, but more importantly, the lower AGI got the taxpayer much larger refundable credits due to getting just under AGI threshold phase-outs by omitting 2/3rds of the retirement distribution. And as a further note, the IRA was an inherited IRA, which some people have incorrectly claimed were not eligible for CRDs.

So my advice is, what do you have to lose by filing an amended return with the 8615-E? Worst case it takes a while for the IRS to reject it. I understand your case is different in that none of the original income was included, so the IRS wants some money now. Depends on the dollar amounts and the ability of the taxpayer to pay now -- maybe set up an installment plan while waiting for a response on the 1040-X?

In my original anecdote, I can't explain why the IRS didn't follow their own reg -- maybe there is an argument that since no Form 8615-E was ever filed, then no election was ever made? Or maybe the dollar amount was too small for them to bother with. For a provision that was intended to help people in a tough time, it seems odd that the IRS would enact some arbitrary restriction to disallow the relief on a technicality that would impact many taxpayers (for reasons such as the one I mentioned, lack of support by DIY software packages).

[terryats]

Here is a link from IRS for instructions on 8915E showing you can amend 2020. https://www.irs.gov/instructions/i89...39848471783408

[Rapid Robert]

No one is asking about amending a Form 8615-E to reflect repayments. Rather, the question is whether or not the following is true:

"It is my understanding that the coronavirus relief using form 8915-E for 2020 is not an available solution due to the client's failure to claim on his original tax filing."

From the form instructions, there is this:

"Line 9.
If you don’t check the box on line 9, you must spread the amount on line 8 over 3 years. By checking the box, you elect to include the entire amount in income in the year of distribution. You cannot make or change this election after the due date (including extensions) for your tax return. "

So if you originally filed Form 8615-E with a timely filed return, you are locked in to whichever way you went, like it or not (again, not a feature of the actual law, just an IRS administrative requirement). However in both the OP and in my anecdote, no 8615-E was filed. I would take the position that if you file your original Form 8615-E after the (extended) due date (for example via an amended return), you can't check the box to make the election, but you should still be able to apply the default 3-year spread, exemption from penalty, and option to repay.

[New York Enrolled Agent]

No one is asking about amending a Form 8615-E to reflect repayments. Rather, the question is whether or not the following is true:

"It is my understanding that the coronavirus relief using form 8915-E for 2020 is not an available solution due to the client's failure to claim on his original tax filing."

From the form instructions, there is this:

"Line 9.
If you don’t check the box on line 9, you must spread the amount on line 8 over 3 years. By checking the box, you elect to include the entire amount in income in the year of distribution. You cannot make or change this election after the due date (including extensions) for your tax return. "

So if you originally filed Form 8615-E with a timely filed return, you are locked in to whichever way you went, like it or not (again, not a feature of the actual law, just an IRS administrative requirement). However in both the OP and in my anecdote, no 8615-E was filed. I would take the position that if you file your original Form 8615-E after the (extended) due date (for example via an amended return), you can't check the box to make the election, but you should still be able to apply the default 3-year spread, exemption from penalty, and option to repay.

First, the restriction on not changing any CRD election is in Notice 2020-50. I note IRS Notices are a source of authority.

If I understand Hoosier’s post correctly, the distribution was not reported at all and H. would like to eliminate the 10% penalty. I think that is possible for sure - I would respond to the CP2000 (not an amended return) and establish that the distribution was indeed a CRD. That has nothing to do with any 1 year v 3 year spread. The 10% penalty was waived for any CRD (up to $100K) regardless of how the money was reported. H. - you just need to provide documentation to show the taxpayer satisfied one of the conditions in the above referenced Notice.

[Rapid Robert]

"That has nothing to do with any 1 year v 3 year spread. The 10% penalty was waived for any CRD (up to $100K) regardless of how the money was reported"

But he still has that understatement of tax penalty to deal with -- cutting the taxable income by 2/3rds should help reduce or eliminate that.

"I would respond to the CP2000 (not an amended return) and establish that the distribution was indeed a CRD"

Agree, I should have been more clear. Although a 1040-X could be efiled, a separate amendment should not be filed when there is already a CP-2000, it will just confuse things. Instead, respond to the CP-2000 as stated in the letter instructions. (unfortunately this will take many months) The best way to show how/why you don't agree with IRS proposal is with a pro forma 1040-X in your CP-2000 response, including the Form 8615-E, which establishes your position that it is a CRD. (Some advise stamping "Do Not Process - CP2000" or similar text on each page, or at least on any signature lines). Fortunately the 3-year spread is default, no election required.

"need to provide documentation to show the taxpayer satisfied one of the conditions in the above referenced Notice."

I would just provide the 8615-E. Wait to see if the IRS asks for extra paperwork, providing it when not wanted might just bolix up the works and is extra hassle, and forces sharing personal information that isn't really the IRS' business for routine purposes (health, etc). Has anyone got an anecdote of the IRS asking for backup paperwork to support whether someone is a qualified individual for CRD purposes?