2020 COVID Distribution and tax returns have not been filed for 2020,21, or 2022.

[GTS1101]

I have a returning client who never filed their 2020,2021, or 2022 tax returns. The wife took a COVID distribution in 2020. Since they did not file timely are they still able to spread the distribution over 3 years.

From my research, I found that if you did not file timely than you cannot include it all in 2020 and you have to spread it over 3 years but I wasn't 100% sure.

[New York Enrolled Agent]

I believe you are correct as per the content of IRS Notice 2020-50. The default treatment for inclusion in gross income is the three year spread.

[GTS1101]

Thank you for the confirmation. Appreciate your help!

[Rapid Robert]

I find this aspect of the CARES Act somewhat confusing, but generally less limited than people think.

"From my research, I found that if you did not file timely than you cannot include it all in 2020" -- this is not true, read on.

First comment to OP: was the wife over age 59.5? If so and no desire to repay, a distribution taken in 2020 does not have to be considered a coronavirus-related distribution (CRD). It's not like the IRS is going to claim that you must have been a "qualified person" if you say you weren't. So it is still an option to include all the income in 2020 if desired.

Second, the law itself says the 3-year spread for a CRD is mandatory unless elected out; but the Notice says "allows the distribution to be included in income ratably over 3 years", and later, "a coronavirus-related distribution is permitted to be included in income ratably over 3 years". "Allows" and "permitted" (the Notice) does not sound like "shall" (the law) to me.

Third, the Notice says "a qualified individual is permitted to elect out of the 3-year ratable income inclusion and include the entire amount of the taxable portion of the distribution in income in the year of the distribution. This election cannot be made or changed after the timely filing of the individual’s federal income tax return (including extensions) for the year of the distribution". It is silent about what happens if the original timely filed return did not report the distribution as a CRD, but a later amended return does so. It is also silent about the OP's situation, which is no return was timely filed.

In a case I have first hand knowledge of, a taxpayer used TurboTax to complete his 2020 return and file it before the original due date (4/15, ignoring disaster postponements). TurboTax did not have Form 8615-E available at that time, so taxpayer included the entire amount in income, but not as a CRD (he is over 59.5, so no 10% penalty). Note that at this point, NO ELECTION has been made, because there was no CRD, even though all the income was included in the first year. Later, I determined that there was significant benefit to reducing AGI for 2020 by using the 3-year spread, so an amended return was filed, after the extended due date, with Form 8615-E, which amended the original return to 1) report the distribution as a CRD, and 2) take the default 3-year spread. The IRS and CA FTB accepted the amendements with no questions asked.