Early 1099R Distribution labeled as 1; not IRA-Qualifies as 8915E Dist; Filled in 1099R QDDSW & 8915E-Not 3yr spread; Why is Full Distribution reversing on Line 4b?

[Just-Lisa-Now-]

Look at the 8915E, is the box checked under Line 5?

I had this happen when the TP was marked as deceased...if youre dead, no 3 year spread

[taxmanbrian]

Hi Lisa and thank you for the response.  The box under Line 5 is checked and my client is alive and well.  Our goal is to pay the tax on the distribution in full with no 3 year spread but avoid the 10% penalty as we truly pulled the funds for the cash due to limitations in employment with the Coronavirus Pandemic.  We had tax withheld upon the distribution.  What is strange about this is the entry on 5b on the 1040 is showing my full distribution, but it's showing a reversing entry on 4b on the 1040 of the full amount???  I populated this tax return early in the tax season, waiting for the 8915E to become available.  I have even tried to delete the original 1099R and have re-entered it with the same results.

[Just-Lisa-Now-]

you only have 1 1099R entered? If you right click on the reversing entry on 4b , and Cross Reference does it lead you back to the entry point?

[taxmanbrian]

Interesting you would ask that.  There is another Inherited IRA that belongs to the Spouse with a 4 in Box 7.  Using the Cross Reference function, the reversing entry is showing in the Taxable Amount of the Spouse's Inherited IRA.  

Thoughts?

[qbteachmt]

What does "not IRA" mean? What sort of account was this taken from?

The code 1 is because the entity issuing the funds and the 1099-R doesn't know what is happening with the money and to them, that's a regular distribution until the taxpayer (through you) states otherwise.

[Just-Lisa-Now-]

theres been some odd behaviors with the inherited IRAs as well as the 8606 recently, I dont remember seeing this situation, but its possible that its related.

[taxmanbrian]

The distribution is not an IRA but rather another tax deferred retirement distribution from the Taxpayer's, not Spouse's, employee retirement plan.  

From my interpretation and the definition on the back of the 1099R, box 1 refers to an Early Distribution before 59 1/2.  Doesn't refer to what type of Early Distribution the release is coming from.  My experience would be that the IRA box would be checked if it was an IRA distribution.  

Thoughts?

[taxmanbrian]

What are you thoughts on an "Overwrite" if possible?

[Just-Lisa-Now-]

Im curious, if you change that 4 to a 7, does the problem go away?

[qbteachmt]

I took a look at some other 8606 reported issues, but a non-IRA 1099-R should not be part of that issue. However, the 8606 issues include handling inherited (from nonspouse) IRA incorrectly.

[Just-Lisa-Now-]

did you see where they said the incorrect adjusting entry on Line 4b traces back to an IRA with a Code 4?

[taxmanbrian]

I changed to a 7 and no change.  I went back into the Form 1099-R Summary too and at the top of the summary, it definitely shows what belongs to the Taxpayer and what belongs to the Spouse.  Just for clarification purposes, the Spousal IRA distribution is due to the death of the Spouse's father.  However, when I scroll down on the Form 1099-R Summary, that's where I see the negative number under line #7 and then under lines 22,25, 25c, 25f, 25h, 26, 26e, 32c and 32d, the correct distribution is showing under the Taxpayer's column.  Under Tax Withholding, Box 4 (Line 37) under the Taxpayer, it is showing the correct Fed Tax Withheld and then under Line 40, the Total Distribution shifts to the Spouse under Nontaxable IRA Distributions???  To also clarify what I mean by the 'negative" number on line #7, it is the total Taxpayer distribution less the Spouse's IRA distribution.

[taxmanbrian]

Just an FYI, there is no associated Form 8606 appearing on this tax return.

[qbteachmt]

Was that an inherited Roth?

[taxmanbrian]

Not an Inherited ROTH - It was a Traditional IRA

[Just-Lisa-Now-]

Strange, maybe we can get someone for you to send a Sanitized copy of the file to, so they can see if this is a program malfunction or not.

@IntuitBettyJo   Im having a hard time following exactly whats happening here, but it sure sounds like theres a programming issue, it seems to be comingling the TP and SP distributions.