5329-S Not being required for filing

[altocpa]

I have a husband and wife who both took early withdrawals from IRAs and received 1099-R.  The primary taxpayer generated a 5329 for efile, but the 5329-S did not; however, the total on line 6 of part II on the 1040 includes the 10% for both. When I e-filed, only the 5329-T was transmitted, so the IRS thinks there is a problem in the transfer of numbers between the 5329 and Schedule 2.  I've opened the 5329-S, but it still does not show up in the electronic filing packag

[TaxGuyBill]

On the 1099-R worksheet, did you accidentally forget to mark the spouse's 1099-R as belonging to the  "spouse"?

[altocpa]

No, they are individually marked.  He had some exceptions to the 10 penalty on his, and she did not.  So his was included in the e-file, and hers was not.  I know that if you only owe the 10% with no exceptions, sometimes the software does not require the 5329.  But here is a couple, one who has an exception and one who does not.  The 1040 says "No" for requiring the 5329, but the 5329-T was included, which is where the IRS is having an issue.  I could split the exceptions between the two of them, which would make both generate, but the problem is the return has already been filed and the IRS is now saying that they owe less than they actually do because the 5329-S is not there to support the number on Schedule 2 and the 1040. The client feels that I did something wrong and they owe less than they actually do.

[qbteachmt]

Were they the same type of account? Does the Spouse have funds that fall into some rule that the primary taxpayer doesn't qualify for? Did you mark one of them as covid-qualified, but not the other? Was one of them over the limit? Only you can tell us the differences, which might result in the penalty or not, and which might be one and not the other.

[altocpa]

No, they are individually marked.  He had some exceptions to the 10 penalty on his, and she did not.  So his was included in the e-file, and hers was not.  I know that if you only owe the 10% with no exceptions, sometimes the software does not require the 5329.  But here is a couple, one who has an exception and one who does not.  The 1040 says "No" for requiring the 5329, but the 5329-T was included, which is where the IRS is having an issue.  I could split the exceptions between the two of them, which would make both generate, but the problem is the return has already been filed and the IRS is now saying that they owe less than they actually do because the 5329-S is not there to support the number on Schedule 2 and the 1040. The client feels that I did something wrong and they owe less than they actually do.

[Terry53029]

In your original you stated " the total on line 6 of part II on the 1040 includes the 10% for both". In your second reply you said " He had some exceptions to the 10 penalty on his, and she did not." Sounds to me like you may have some errors in data entry, as I have been using ProSeries for a lot of years, and have never had a situation as you describe.

[altocpa]

The total on Schedule 2 is 10% times the amount subject to the penalty for both of them.  He withdrew $10941 from his IRA with code 1, and had $5000 in exceptions to the 10% penalty.  This left $5941 subject to the penalty, or $594 dollars.  She withdrew $34200 from her IRS with code 1, with no exceptions listed to the 10% penalty.  That is a total of $4,014, which is what is on schedule 2 of the 1040, and on the 1040.  For some reason, because she didn't have any penalties, is chose not to include her 5329-S in the return, so the IRS is saying that they owe $3,420 less.  I'm concerned that the IRS will catch up to their own mistake and bill them in the future, plus interest.

[The-Tax-Lady]

I had many COVID related distributions in 2020 and the software performed surprising well.

The main question you are missing is "Was it a COVID Distribution as defined by the IRS for TY2020.

If yes, both individuals are eligible for an exclusion of the 10% penalty on a maximum distribution amount of 100,000 each, period. Did they spread the tax repayment over the 3 years?

I agree, it sounds like you have data entry errors on the worksheet. It also sounds like the IRS is correcting those errors, as it is doing in so many other areas, and reducing the tax liability based on those corrections.

You can always save a copy and try to amend the original return, as a way to discover where you made an error, if you're not seeing it in the original return.

The IRS wants LESS money? They're usually pretty sure in those cases and unlikely to be returning for more money due to an error in their calculations, so "Stay Calm and Carry On".

Be glad you didn't cost your client money, due to a possible data entry error, that you would have to fix by amending the return and explaining the error yourself. Worst case scenario, nobody realizes there is a mistake and you just created a tax liability that cost your clients a lot of money.

[BobKamman]

What date of birth did you enter for the wife?  I wonder what happens if a 1099-R has Code 1 but the taxpayer is 60 years old all year.  

[The-Tax-Lady]

If that creates the 10% penalty, you have to complete the the 5329 for the over 59 1/2 age exclusion.

I'm not 100% sure and too tired to look at a return, but I believe the software does cancel the 10% penalty calculation if the person is 60 as of Jan.1 for the tax year being filed. I remember looking for why there was no penalty on the return, before I remembered the client's age, on a 1099R, Code 1.

[altocpa]

Between the two of them, there are only $5000 of COVID related expenses.  They are not eligible for anything additional.   I think the 5329s are both right as I prepared them, just don't know why the 5329S didn't transmit with the e-file.  The 1040 said the 5329 was not necessary, yet it included the 5329T but not the 5329S in the e-file.

[altocpa]

The husband was 58 I'm 2020 and the wife 49, so that situation doesn't apply either.

I'll make sure to "keep calm and blah blah blah", but I'd rather have an answer.

[BobKamman]

I didn't ask how old she is, I asked what date of birth you entered for her.  Have you checked that?

[altocpa]

Yes, their dob years are entered so the system properly identifies them as 58 for the husband in 2020 and 49 for the wife in 2020.  Birth years 1962 and 1971.

[qbteachmt]

"Between the two of them, there are only $5000 of COVID related expenses."

It isn't clear what this "expenses" means. Have you read on the covid distribution penalty exception that they likely would both qualify for?

Click here: https://www.irs.gov/newsroom/coronavirus-related-relief-for-retirement-plans-and-iras-questions-and-...

Both of these distributions are under the $100,000 limit.

[qbteachmt]

Oh: "but I'd rather have an answer."

Well, yes, we've been trying to help without being able to see the info for ourselves.