From 1041 IRD with 1099R issued with deceased taxpayers social security number and federal tax withheld

[bbeck]

Taxpayer died in 2020, filed timely final 1040 with surviving spouse in 2021. Taxpayer had IRA with no named beneficiary.  IRA issued a 2021 Form 1099-R in decedent’s name and social security number. How can I report this to minimize the income tax?

[qbteachmt]

Minimize the income tax? You would have a reduced income tax if you can show there is basis in that account. The regular inherited IRA provisions apply, per the SECURE Act.

[sjrcpa]

It gets reported on decedent's estate 1041. Fully taxable in 2021 unless it was distributed to an estate beneficiary in 2021.

The estate could potentially file using a fiscal year.

In September 2022 there is nothing you can do to minimize the tax.

[bbeck]

Check from IRA custodian was issued to The Estate of Taxpayer, as IRA had no named Beneficiary.  The 2021 1099-R was issued in the Taxpayers name and social security number, with federal income tax withheld.  How will IRS know the tax withheld is for the Estate?

[sjrcpa]

Because they know he is dead.

[qbteachmt]

Have you looked at the distribution code for Box 7? Is it code 4?

[bbeck]

The distribution code is 7, normal distribution.

[bbeck]

There is no basis in the IRA.  As estate rates are higher than individual rates, can I distribute the IRD to surviving spouse with the income tax withheld to her on a K-1?

[sjrcpa]

Did she receive the IRA proceeds within the estate's 1041 calendar/fiscal year?

[BobKamman]

Follow the money.  Who cashed the check?  Whose bank account?  What happened to it then?

[bbeck]

The check was made payable to The Estate of Taxpayer.  He had the IRA with no named beneficiary.

[bbeck]

Check was deposited in to a bank account established for the Estate.

[sjrcpa]

And if it was still in that account at the end of the estate's tax year (or 65 days after) then no you can not treat it as if it was distributed to the spouse.

[BobKamman]

Established by whom?  And they're just getting around to noticing this  problem in late September?  I smell a blended family.  Guy doesn't name his wife as beneficiary of an IRA.  She doesn't seem to know much about the IRA distribution.  He has a child from previous marriage who is handling the estate?  

[bbeck]

The bank account was established by the named executor.  There is nothing shady going on.  This was an old IRA for an elderly taxpayer who neglected to designate a beneficiary decades ago when he set up the IRA. 

I've seen this happen before, unfortunately.

[BobKamman]

And who is the named executor?  The people on this forum help the most, when they have all the facts and don't have to play "I've Got A Secret."  I don't see anything shady, I just suspect the elderly taxpayer was not married, or was married to someone else when he set up the IRA, and that's why there is no beneficiary named.  And that's why the widow is having problems at this very late date.  

[bbeck]

None of these details matter to my question as to the best treatment of this unfortunate tax situation. The named executor is the decedent's daughter.  The decedent was only married once, his spouse survives him.  IRA regulations are quite specific that when there is no named beneficiary of an IRA, the IRA goes to the decedent's estate and the IRA custodian must withhold at least 10% for federal tax.

[BobKamman]

No, the distributions are not subject to 10% withholding if the beneficiary (even if an estate) elects out of it.  So at least now we know the daughter created this mess.  Is she your client?  I wouldn't want to be doing returns for both the widow and the daughter, because they have a conflict of interest and I would have to explain to both, the harm they had caused.  

If the widow is your client, the IRA has nothing to do with her 2021 return. If the daughter is your client, did she even request an extension for the 1041?  Was there any reason for her to keep the money from her mother?  I am not trying to imply there is something shady.  Just stupid.  

[qbteachmt]

Didn't you just answer your own question?

"IRA regulations are quite specific that when there is no named beneficiary of an IRA, the IRA goes to the decedent's estate..."

[bbeck]

Thank you.  I was hoping that the Community would confirm my understanding of the IRS rules as to an IRA with no named beneficiary. An unfortunate tax situation to say the least.

[EstateAdmin]

Only option is to do a trustee to trustee transfer to Estate of IRA.  Kicks the tax liability down to road a bit.   Also prob keep the estate open longer than most like.   Most custodians won’t do a trustee to trustee transfer from the estate to the beneficiary even though the IRS has issued many private letter rulings (PLR) permitting.  Custodian might do the transfer is you attain a PLR. They are expensive to attain.

Path forward all depends on tax impacts to estate/beneficiaries 

[bbeck]

Thanks for your reply.  The root of the problem is that the deceased did NOT name a beneficiary.  Thus your response was not applicable to the situation.  I do appreciate your response and attempt to assist.

[EstateAdmin]

Unless I missed something, the estate is the default beneficiary.   
if you have not already done a lump sum distribution, you still have avenues to potentially reduce tax liability to the beneficiaries of the estate.

1) was there a will?  
2) irs does not prohibit an estate to hold an estate inherited IRA.  If the custodian is willing, a trustee to trustee transfer to an estate of xyz inherited IRA can be done.  In most cases IRA custodian will not take the risk without a private letter ruling from IRS legal counsel to do a trustee to trustee transfer to the beneficiaries from either directly from the decedent’s Ira account to the beneficiaries or from estate inherited Ira to the beneficiaries.  
3). I believe current rules require a an estate inherited IRA to be fully distributed in 5 years. (Verify against current IRS regulations).   
4). Downside is the estate would remain open during the distribution period. 

4).  Downside is the estate would remain 

If this option is available, it could reduce the tax liability to the beneficiaries of the estate.   

Note, this does not apply to a 401k, rules for trustee to trustee transfer are defined in the 401k plan document.   Nasty place to leave qualified funds in an employer sponsored 401k plan.  Leaving funds in a employer sponsored qualified account can have significant tax implications to non spouse beneficiaries.  

[EstateAdmin]

“Taxpayer died in 2020, filed timely final 1040 with surviving spouse in 2021. Taxpayer had IRA with no named beneficiary.  IRA issued a 2021 Form 1099-R in decedent’s name and social security number. How can I report this to minimize the income tax?”

this is a dilemma.  How does a deceased person earn income?  Can’t right?

This brings in a question, can a nominee distribution 1099 be filed for a tax years after the descendent’s last return has been filed?  Ie, file 1099 and 1096 with IRS without filing a 1040?

this assumes there is a Will and court appointed administrator: 

the ideal solution and one stated in IRS Publication 559.  See section “identification number”

https://www.irs.gov/pub/irs-pdf/p559.pdf

is to have the custodian that sent the 1099 to issue a corrected 1099 to the beneficiary stated in the Will or in the name of the estate and associated ssn or EIN.  Unfortunately they probably refuse even though they could face penalties imposed by the irs.   If the 1099 was issued for year 2020 a nominee distribution 1099 like form example found here:

https://www.irs.gov/pub/irs-pdf/f1099r.pdf