Taxable Amount of IRA

[ShoeBox Taxes]

2018 Form 1040

Taxpayer has a Form 1099-R with an amount in Box 1 (gross distr.) and a different amount in box 2a (taxable amt.) The box 2b "taxable amount not determined" is NOT checked.

I have done this millions of times. Okay, maybe only thousands.

Normally, the gross amount goes on line 4a and the taxable amount goes on line 4b, if they're different.

For whatever reason, just for this one particular 1099-R, ProSeries is making the full amount (box 1) taxable.

Does anyone know why?

FYI, it's box 7 code is 7, regular distribution. Not that that makes a difference, because even if it were an early withdrawal, that wouldn't change the amount taxable, just the amount that would be liable for the additional 10% penalty. 

Do I need to check a box somewhere? I've never had to anywhere else, just put the correct amounts in boxes 1 and 2a as they are reported.

[IRonMaN]

Is the IRA box checked on the 1099R?

[Terry53029]

I you check the IRA box, the program will put the amount in box one as the taxable amount no matter what you put in box two. You have to fill out the worksheet to show a basis, if the IRA box is checked. About 1/2 down on the 1099 is a "quickzoom to enter traditional basis"

[ShoeBox Taxes]

Well, those little sneaks! 

And what "basis" do I enter to make it come out correctly? That makes no sense.

[IRonMaN]

Unless your client made nondeductible contributions to the IRA, it is correct as fully taxable.  If nondeductible contributions were made, you have a little more homework to do, starting with what the total amount of nondeductible contributions was.

[sjrcpa]

The total nondeductible contributions (basis) should be on Form 8606 that was filed each year nondeductible contributions were made . You also need the FMV of all the taxpayer's IRAs. 

[Terry53029]

Like @IRonMaN  said, you have some homework to do. If he does have a basis, and doesn't know his basis, you will have to play with the basis worksheet to get it the way you want. 

[ShoeBox Taxes]

The client has no idea. They never do. I know the correct, text book answer is, "Ask the client what the basis of the IRA was at year-end," but the answer is always the same. The client says, "What does that mean?"

Expecting the client to know this is ludicrous. If the bank says "X amount is taxable," then why not accept that?

Did I mention the box "taxable amount not determined" is NOT checked? If the bank didn't know whether there were any nontaxable contributions, they would just check that box, like they always do. Then sure, it's 100% taxable. The fact that they put a different amount in box 2a says they have specific information. 

Since the return is due today, "doing homework" is not an option.

Like I said, if the bank knows that X is the amount that is taxable, and the 2b box is not checked, why would ProSeries not accept that answer? 

[ShoeBox Taxes]

Thanks!

If you make the basis at year-beginning the difference between taxable and non-taxable, and the basis at year-end be $0, it works out correctly.

(Which makes sense if you stop and think about it.)

[TaxGuyBill]

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@ShoeBox Taxes wrote:

Since the return is due today, "doing homework" is not an option.

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Huh?  A 1040 from 2018 is not due today.  That was due a LONG time ago.

And yes, "doing homework" would be required if something does not make sense.  It would be the taxpayer's fault and problem if they procrastinated until the last minute. 

[abctax55]

'...Expecting the client to know this is ludicrous.'

No, it isn't.  And as with most 'basis' issues, the IRS has the right to determine the basis is zero if the taxpayer hasn't bothered to keep track.   That info is maintained on the F 8606, carries from year to year, and should be part of the interview process if the client is new to you.

[ShoeBox Taxes]

Client got a CP2000 from the IRS. They gave him 1 month to respond, and that expires tomorrow. The taxpayer gave it to me around the 12th of October, and I started working on it after the 15th.

The original 2018 was timely filed (by a company that isn't supporting him, no names mentioned). IRS is saying he owes additional taxes. He also missed some interest income, saying he never got the 1099-INT (which I believe), so I'm trying to figure out how much he does owe, and was surprised to see ProSeries come up with the same amount that the IRS did, even though I entered a portion of the pension as non-taxable .... thus, my question.

If this were the only thing I were working on, I certainly could have done some more homework on it a few days ago. But considering I have to stay at home to do "distance learning" with my special-needs kid every day from 8:30-2, and don't get to work until 3PM, so I have 2 hours to make all the "business hours" phone calls I need to, a lot of stuff falls through the cracks. If this COVID crap doesn't go away in time for tax season, I don't know what I'm going to do.

[ShoeBox Taxes]

Sorry, I have to disagree vehemently. In this case, the client is accepting the bank's assessment regarding the taxability of the IRA. There is nothing unreasonable about accepting the assessment of the organization that holds the fricking asset.

The onus falls on the IRS to explain why it doesn't accept their assessment. A taxpayer should not be expected to have to explain why it accepts the bank's assessment. 

If the government is going to question ANYONE about how banks value their assets, they should question the banks, not taxpayers. 

Honestly, this is exactly what's wrong with this country. Government throwing its weight around, punishing "the little guy" for mistakes that big-wigs make. Pitchforks and torches, my friends. Choose your side wisely.

[abctax55]

If the government is going to question ANYONE about how banks value their assets, they should question the banks, not taxpayers.

Um... apples & oranges; VALUE does NOT equal basis. 

The taxpayer put the money into the investment; the taxpayer should pay attention & keep records of said contributions.

I agree, this country has issues.  One being the fact many folks don't want to accept responsibility for themselves.

[rbynaker]

I'm not a financial advisor so I'm not up on all the crazy hybrid schemes out there.  How can there be an IRA where the bank can determine the basis?  All IRAs are aggregated for tax purposes so any one bank issuing a 1099-R would have no way of knowing for certain (not certain enough to report it on a tax form anyway) whether or not the taxpayer make a non-deductible contribution to an IRA at another bank.

You can have a non-qualified annuity where the bank CAN determine basis, but in the cases I've seen for those, the IRA box is not checked.

If I ran into something like this, I would have to have a three-way call (or skype or zoom, whatever the kids are using these days) with the taxpayer and the bank/financial advisor so the bank/FA could explain to me under what circumstances they could issue a 1099-R with the IRA box checked and the not-determined box unchecked.

[sjrcpa]

If you can get through to the IRS you can explain your and client's situation and get more time to respond.

[TaxGuyBill]

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@rbynaker wrote:

I'm not a financial advisor so I'm not up on all the crazy hybrid schemes out there.  How can there be an IRA where the bank can determine the basis?  All IRAs are aggregated for tax purposes so any one bank issuing a 1099-R would have no way of knowing for certain (not certain enough to report it on a tax form anyway) whether or not the taxpayer make a non-deductible contribution to an IRA at another bank.

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That was my original thought too, but then I looked up the Instructions and there are a few odd situations where it could be different.  

Because (a) ProSeries and TurboTax use the same 'tax engine', (b) Intuit wants TurboTax as dummy-proof as possible and (c) 99.99% of IRAs the full amount would be "taxable" on the 1099-R, I think Intuit erroneously forces the full amount to be taxable if the IRA box is checked.

[qbteachmt]

"and the basis at year-end be $0,"

But that would only be true if there were total distributions from all deferred accounts for this tax year. There is no such thing as "this will zero out" the basis, by the taking. It's always prorated, until the accounts are all emptied. Basis will be zero when all accounts are empty, if there is basis at all. Or, it becomes a minimal portion of a percentage.