1099-R Charitable Contribution error

[DeveraC]

Good evening, everyone.

I have a client who had a traditional IRA distribution via 1099-R, and of the total box one and box two distribution, $7k was for a charitable contribution for TY2024. Unfortunately, due to USPS issues, the check never arrived at the organization and was not cashed, but was also not discovered by the client until this year (2025). 

The financial house will not correct the 1099-R to indicate the funds were not distributed in 2024 (2 hours on the phone). They also will not reissue the contribution stating it was for TY 2024 since it is now 2025. They have said the contribution can only be reported for the year the check is sent.

So, how do I correctly report the 1099-R as less taxable by the unreceived $7k, since the funds weren't distributed to either the client or the charity? I feel like if I just adjust the amount in box 2, it is going to trigger a letter or audit by the IRS due to not matching up with the reported document. 

Thanks, y'all. I've never experienced this before!

Devera

[IRonMaN]

The organization never received the contribution so your client doesn't get the deduction.  The full $7,000 is taxable.

[DeveraC]

Really? But the check wasn't cashed and he wasn't distributed the money directly. They have canceled that check to the organization so the money went back into his IRA (although technically in 2025.)

[rbynaker]

I mostly agree with IRMN (unless this is one of those posts where the facts keep changing when people don't like the answers they're given) but I am curious, what happened to the $7,000?  If the broker says they took it out of the account don't they either need to put it back when the check doesn't clear or reissue the uncashed check in some form?  How did the taxpayer know that the check was not cashed?

Some IRA accounts have a checkbook now so folks can write their own checks to charity.  These won't come out of the account until they clear the bank (because that's the only way the broker knows you wrote a check) so I strongly discourage clients from waiting until December to mail these things.

Starting in 2025 there's a new code "Y" for the 1099-R (see PDF page 9) for QCDs.  I haven't looked to see what the rules might be for how the broker knows which payments go to qualified charities and which don't.  But that's a next-year problem.  I'm guessing taxpayers will just "self-certify" (i.e. "check this box if you don't want the IRS to tax you on this distribution").

Rick

[DeveraC]

The check was issued in July 2024 directly from the financial house and mailed to the organization.

Neither the organization, financial house, nor the taxpayer realized the donation (check) was missing until Feb. 2025. The taxpayer requested a letter from the organization stating they had not received the check and supplied that letter to the financial house, requesting a stop payment on the check.

The financial house has canceled the check and is reissuing a new check to the organization this month. The taxpayer requested the replacement check to be designated as a replacement for the 2024 donation and indicated as such. The financial house said they could not designate it as a 2024 donation since the check has a 2025 issue date. 

Therefore, while the monies were distributed in 2024, they were returned (at no fault of the taxpayer) to the IRA account in 2025 via cancellation of the check. 

So, does he still have to claim all the income as a distribution? Or, is there some form or something else I can indicate in the ProSeries software to indicate that $7k is not taxable in 2024, since it's going to be donated in 2025?

[rbynaker]

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@DeveraC wrote:

Really? But the check wasn't cashed and he wasn't distributed the money directly. They have canceled that check to the organization so the money went back into his IRA (although technically in 2025.)

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It's a bad situation any way you look at it.  If it's the broker's position that the $7,000 was distributed in 2024 (which may be iffy) then how do they report the $7,000 that was un-distributed in 2025?  As a contribution?  Rollover?  Was it within 60 days (I doubt it since most checks are good for 90-180 days)?

If instead we pretend the $7,000 wasn't distributed in 2024 (which may be iffy, I'd bet there's a quarterly statement somewhere showing the money coming out), did the taxpayer miss their RMD?  Pick your poison.

[rbynaker]

We keep crossing posts.  It sounds to me like a 2024 distribution (clearly was deducted from the account) but doesn't qualify as a charitable contribution because there's no written acknowledgment for 2024.

Maybe request a PLR and see what the IRS thinks.  The charity substantiation rules are strictly codified and don't have a lot of wiggle room.

You can try to argue that the distribution never actually took place and maybe do a Form 8275 disclosure (but to be consistent, if this was the RMD you'd also file the 5329 for the missed RMD.)  No idea how material the amount is to the overall return.

[DeveraC]

Yes, this is what I'm concerned about. It's a no-win situation. He either chooses to be taxed for money he didn't get or takes a risk for audit by changing the taxable amount. 

[rbynaker]

I'll bet you a shiny nickel (Hi Phoebe) that this problem will spill over into 2025.

If the broker arbitrarily put money back into the IRA in 2025 then issued a replacement check (coming out of the IRA in 2025) won't this show up again on a 1099-R in 2025?  So one $7,000 check shows up as two $7,000 distributions?  I don't see how they can have it both ways.  If it's out of the IRA, okay, but then it has to live in limbo (or purgatory) until resolution.  There are rules limiting how money gets into an IRA.