1099 Code "P"

[Snaggletooth]

This seems to be an increasing problem, with a solution so simple, only the government could fail to see it.

How many of you have had 1099-Rs from retirement programs, with a code "P." This causes a lot of trouble, and makes clients very livid when you explain it to them. Simply put, these things create a reporting requirement a year in advance of their date.

If your client receives one dated 2004, that means the income is to be reported on their 2003 return. This means their 2003 return must be amended. For reasons I'm sure you will understand, my fee for a 1040X is pretty stiff by comparison, and part of the reason is to discourage customers from having them by reporting all income in the year of question.

The fund custodians send a letter every year (always seems to be after March 15) advising the recipient that they will receive a 1099R in the following year but the income must be reported the year in question. So if you are preparing a return AFTER March 15th, and the client advises you of the letter, you might be able to report the income "on time" and avoid the amended return mess. I am able to do this maybe 15% of the time, and the customer is fine as long as he doesn't use another tax preparer next year.

Given all of the mayhem this creates for EVERYONE (preparers, clients, custodians, IRS, etc.) why is this situation allowed to continue? I'm sure the answer lies somewhere in the translation of income from one year to another in the retirement account, but at any rate the facts are known at the time and some regulation either forces or allows the custodians to report in this bizarre fashion.

Would like some discussion on the "how and why" this came to be, possibly from well-informed posters with an IRS background or other special knowledge. Secondly, why can't something be done about it?

Thank you in advance - Ron Jordan

[jainen]

Very livid

LIVID: adj.
1) Ash-colored or anemic looking from illness or emotion
"a face livid with shock"; "lips...livid with the hue of death"
2) (of a light) imparting a deathlike luminosity
"livid lightning streaked the sky"
3) Furiously angry
"willful stupidity makes him absolutely livid"
4) Discolored by coagulation of blood beneath the skin
"livid bruises"

My clients don't like taxes either, but all-in-all I don't think they are as interesting as yours.

[Bees Knees]

Its the way its gotta be, sorry.

Here is the deal. I contribute to my 401(k) plan in 2005. I go along all year with my employer withhold X number of dollars out of each paycheck. I never bother noticing, and my employer doesn’t notice that I over contribute to my 401(k) plan for 2005. This mistake is not noticed until March 1, 2006 when the accountant’s doing the employer’s tax return realizes that they goofed up. The law allows them to distribute the excess contributions plus earnings before the due date of the return without having to pay a penalty.

OR, we have a situation where top heavy rules limit elective deferrals that normally would have been allowed. Again, not discovered until after all W-2s have been issued to employees and Social Security.

Now, I suppose you could have the procedure make the employer issue a W-2c. But those will give you just as many, if not more “livid” responses than a 1099R with code P. You still might have 1040X returns, PLUS 941c returns to file.

You might say, well why can’t we just tax the distribution in 2006 when it was discovered? But would that be fair? That would give me the opportunity to defer tax on wages one year simply by making too much elective deferral contributions for the year. So despite the headaches, a 2005 excess contribution has to be taxed on the 2005 return, not 2006 when the excess is discovered and distributed. Otherwise you open up all kinds of cans of worms that would create loopholes for people to jump through.

[jainen]

Jelly beans

The most common occurance of Code P is for highly paid employees who CAN'T know the correct contribution until after the books have been closed for the year. I suppose it would be fair to tax them in the year of the distribution, but that's not the current law. In the great tax battles that Congress fights, this would seem a mighty small corner. Give your client some jelly beans or something to mellow out. And take some yourself.

[Snaggletooth]

Mellow Out?

Jainen, just for that, I'm not going to put you on my "Buddy List." I know that will make you grieve for months!

In reality, Congress doesn't want to deal with the bits and pieces and hidden corners when they pass "great tax battle" legislation. That's why they empower the IRS to write regulations that have the force of law.

An esteemed Michigan cohort, Matt Sova, actually enjoys wasteful complications such as the P code because he says it gives us the chance to raise our hours spent and maximize our revenue. What I regard as wasteful, he regards as opportunistic. I really thought we would hear from him in this thread -- instead we heard from you.....

[jainen]

Buddy list

As far as I know, no one has ever put me on a buddy list. I'm with your cohort. I would eagerly charge for an amended return, and then add a billable hour or two for explaining his options. I wouldn't charge for the jelly beans, though.