I have a client that moved money they had in an IRA to an IRA in a different bank. They received a 1099-R from the bank it was moved from with a code '7' in box 7. They deposited the money themselves into the other IRA within the proper time frame, but

[wjh4848]

I have a client that moved money they had in an IRA to an IRA in a different bank. They received a 1099-R from the bank it was moved from with a code '7' in box 7. They deposited the money themselves into the other IRA within the proper time frame, but did not receive a 1099-R from them, only a Form 5498 showing the rollover contributions in box 2. How should this be input in lacerte?

[abctax55 · Accepted solution]

The F 1099-R is for *money out*.

The F 5498 is for *money in* - you don't get a F 1099-R for that.

As this was an indirect roll-over - you have to tell the software that.  

edit - it's under "Sections" on the left side, down to *Rollovers* > indirect.

[qbteachmt]

Since the client handled the money transfer themselves, you will need to confirm the gross from the 1099-R is the amount deposited as seen on the Form 5498, and it meets the rollover timeframe. Typically, if the check was in the hands of the taxpayer and payable to the taxpayer, there would have been required withholding. The taxpayer would need to redeposit that amount in full, in other words, making up the difference because of the withholding.

[BobKamman]

Didn't we have this discussion recently?  There is no required withholding on IRA distributions.  

[qbteachmt]

The withholding scenario is affected by direct or indirect and how the payee is listed for indirect and how the paperwork is filled out. Yes, there is a default of withholding.

https://www.irs.gov/retirement-plans/plan-participant-employee/rollovers-of-retirement-plan-and-ira-...

"Will taxes be withheld from my distribution?

• IRAs: An IRA distribution paid to you is subject to 10% withholding unless you elect out of withholding or choose to have a different amount withheld. You can avoid withholding taxes if you choose to do a trustee-to-trustee transfer to another IRA.
   
• Retirement plans: A retirement plan distribution paid to you is subject to mandatory withholding of 20%, even if you intend to roll it over later. Withholding does not apply if you roll over the amount directly to another retirement plan or to an IRA. A distribution sent to you in the form of a check payable to the receiving plan or IRA is not subject to withholding.

How much can I roll over if taxes were withheld from my distribution?

If you have not elected a direct rollover, in the case of a distribution from a retirement plan, or you have not elected out of withholding in the case of a distribution from an IRA, your plan administrator or IRA trustee will withhold taxes from your distribution. If you later roll the distribution over within 60 days, you must use other funds to make up for the amount withheld."

Always do due diligence.

[Accountant-Man]

Assuming that this occurred in 2023, be prepared with the 1099-R, the 5498 hopefully showing the date of deposit, and the cover letter to the IRS coming approximately 16 months after April 2024 in order to respond to the IRS' CP2000. The IRS gets the 1099-R showing the distribution with Code 7.

The IRS cannot match the 5498.

THEY WILL tell you tax is due. TAXPAYER MUST PROVE that the rollover was completed within 60 days of the distribution.

[BobKamman]

This happens thousands of times each year and if the rollover is reported correctly on the tax return, IRS will not issue a CP-2000.

[Accountant-Man]

Agree to disagree, Bob. The 1099-R Code 7 does not show that the rollover happened within 60 days.

Neither does the 5498.

[BobKamman]

Nor does it show how much of the distributions went to QCD's.  IRS can choose to audit a sample of returns that show a rollover property reported (Line 4a with total, Line 4b with taxable) but it does not use the CP-2000 program for that. If the taxpayer just ignores the 1099-R and shows nothing on the return, a notice will be generated.  

Some common sense is needed here, on IRS capabilities for document matching.  And you can find in the Internal Revenue Manual 4.19.3.8.10.4 (10-07-2019)
Rollovers, the instructions for examiners to look at the 5498 (with no instructions, to correspond with the taxpayer asking for payment dates).  One glitch that may occur is if the distribution is in one calendar year and the 5498 deposit doesn't show up until the following year:

1. Taxpayers may partially rollover retirement plans reported on Form 1099-R. Consider a distribution to be partially rolled over when all the following apply:

   1. the taxpayer enters the "GR/A" amount on the gross return lines,

   2. a lesser amount on the corresponding taxable line,

   3. a 5498 IR is present with the literal "ROLVR" or "FMV" in the INCOME TYPE field AND

   4. has an amount that ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

2. If a 5498 IR with either "ROLVR" or "FMV" is not present to substantiate the rollover (see (6) above), consider the Form 1099-R distribution partially U/R when the taxpayer enters the GR/A amount on the gross return lines, reports a lesser amount on the corresponding taxable return lines.

If	And	Then
The net amount (GR/A minus W/H) is greater than or equal to the TX/A amount on the IR	There is an indication of a rollover (per (5) above)	Consider the issue resolved.
The GR/A and the TX/A amount on the IR are the same	The GR/A is reported on the gross pension line of the return (see IRM 4.19.3.8.10, and the difference between the IR and the Form 5498 equals the W/H amount and there is no indication that the taxpayer supplemented the rollover amount to account for the W/H and the amount reported on the taxable pension and annuities line of the return (see IRM 4.19.3.8.10, does not match the W/H on the IR	Consider the difference between the W/H on the IR and the TX/A amount reported as U/R. Send PARAGRAPH 49, (see Exhibit 4.19.3-7, CP PARAGRAPHS) when pursuing the W/H as U/R TX/A from the same IR.