Wisconsin Dept of Revenue now verifying QCD's

[RWG1950]

This past week a customer (that had made a legitimate 2021 QCD) got a notice of an amount due (plus interest) based on "unreported retirement income".
After review of the letter I looked at what we had reported on the return & everything seemed correct, so I called the number on the letter.
The auditor didn't seem to know exactly what it was they were looking for but said an "appeal process" was available. (An appeal of what, I thought).
A day later, an e-mail from my state (WI) indicated they are conducting a "limited issue project" in which they are apparently attempting to root out fraudulent QCD's.
So the state appears to have taken the position (without any inquiry of the taxpayer) that any QCD is not legitimate & the taxpayer is billed for the tax and a penalty.
Taxpayer is further advised the appeal process includes submission of the cancelled check from the IRA and the contemporaneous receipt provided by the charity in order to have the tax and penalty voided.
The receipt and cancelled IRA check verification are fair enough, but it just seems to me like the state is shooting first and asking questions later.

[Rapid Robert]

That sounds pretty outrageous. At least one IRA custodian I know of does not seem to have put any thought into how the charity will know who made the QCD, they only provide a tiny optional "message" field when requesting the QCD online. While the contemporaneous letter is still required, asking for a canceled check is too much - a simple copy of the year end statement indicating a QCD withdrawal should be sufficient.

The real problem is that even after many years of first temporary, then permanent enactment of QCDs, the IRS still has not revised 1099-R to show it.

I wonder, does Wisconsin also go after DAF contributions the same way? Or does it figure wealthier taxpayers are more trustworthy?

[rbynaker]

The real problem is that even after many years of first temporary, then permanent enactment of QCDs, the IRS still has not revised 1099-R to show it.

Ask and ye shall receive!

New for 2025, see page 9, distribution code "Y". "Qualified charitable distribution (QCD) claimed by taxpayer under section 408(d)(8)."

https://www.irs.gov/pub/irs-pdf/f1099r.pdf

Now, if we can just get the IRA custodians to code it correctly . . .

Rick

[kathyc2]

Ask and ye shall receive!

New for 2025, see page 9, distribution code "Y". "Qualified charitable distribution (QCD) claimed by taxpayer under section 408(d)(8)."

Now, if we can just get the IRA custodians to code it correctly . . .

Rick

It's optional for 2025. Unless the entire distribution went to QCD, looks like there will need to be two 1099R's. It puts the onus on custodians to verify that the payment is to an eligible charity, so guessing they will try to fight it.

[RWG1950]

It is interesting how different IRA custodians handle QCD's.
Some Mutual Funds I deal with just use their regular IRA distribution forms - and simply show the distribution to the 3rd party charitable payee and address.
Distribution(s) to a 3rd party from an IRA account holding such securities requires a customer's signature to be guaranteed by the B/D.
Jackson National Life Ins Co has its own specific QCD form and even asks for the tax I.D. # of the charity but still issues a taxable 1099-R form.
I routinely process 100-150 customer QCD's yearly (as their broker) and regularly stress to customers the importance of retaining their contemporaneous receipts.
Given this new action from the state I sure hope my customers have paid attention.

[Rapid Robert]

It puts the onus on custodians to verify that the payment is to an eligible charity, so guessing they will try to fight it.

Is that speculation, or perhaps has the IRS issued regs to this effect? I think the 1099-R reporting is simply to confirm that the taxpayer authorized a distribution to be paid to someone other than the taxpayer, and the taxpayer labeled it as a QCD. I would think the onus is still exclusively on the taxpayer to provide the required acknowledgement statement to show that it was paid to a qualified charity.

[kathyc2]

Is that speculation, or perhaps has the IRS issued regs to this effect?

Not finding any. There's a big difference between sending a payment to an organization that owner requests and putting on an official form that it's a QCD in my opinion. Seems like it would be common sense that if the box is checked they would need to verify. But common sense doesn't always apply....