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Great News – Major Exception Created to the $250 Per Incorrect Form 1099-R Penalty.

Posted by James M. Carlson
Dec 29 2015

It was only 4 months ago when the Trade Preferences Extension Act of 2015 was enacted. This law authorized an increase in the per 1099 form penalty from $100 per form to $250 per form. The $250 penalty applies to the 2015 1099 forms (including form 1099-R) to be filed after December 31, 2015.

Under existing law, there is a de minimis exception, but it is very limited. A filer cannot be penalized even if it has prepared forms with errors (any error no matter how small) as long as the incorrect forms do not exceed the greater of 10, or .005 times the total number of information returns required to be filed by the filer during the calendar year.

The new law creates two “additional” exceptions - if the dollar amount of the distribution is incorrect by $100 or less then the general rule is that such incorrect form is not one for which the IRS may impose the $250 penalty. And the same is true if the amount of federal withholding differs by $25 or less from the correct amount. The IRS may issue regulations to prevent the abuse of these new exceptions.

There is, however, an exception to the exception at least with respect to the individual’s form (i.e the payee statement). It appears the IRA custodian need not issue a corrected form to the IRS, but it will need to issue a corrected form or statement to the individual. If he or she so elects pursuant to procedures to be defined by the IRS.

Note that this new de minimis exception applies to returns required to be filed, and payee statements required to be provided, after December 31, 2016. That is, it applies to 2016 reporting forms and not to the 2015 reporting forms. This new exception is certainly good news. It is a small but reasonable change.

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President Obama Signs the Budget/Tax Bill on December 18, 2015.

Posted by James M. Carlson
Dec 06 2015

As last year, the President signed legislation Friday afternoon before travelling to Hawaii for a two week family vacation. This year he signed the “Military Construction and Veterans Affairs and Related Agencies Appropriations Act of 2016 (Consolidated Appropriations and Tax Measures).” Included in this law is the Protecting Americans From Tax Hikes Act of 2015.

There are 4 provisions impacting IRAs.

First, the qualified charitable contribution/ distribution (QCD) rules were adopted on a permanent basis. A distribution made during 2015 qualifies as a QCD if the following three rules were satisfied - the distribution occurs during 2015, it is for an amount up to $100,000 and the check is made payable to a qualifying charity.

It will be interesting to see if the IRS will change its current administrative practice for QCDs. That is, the IRA custodian prepares the Form 1099-R showing the distribution as being fully taxable and then the individual must explain on his or her tax return that the distribution is not taxable as he or she made a QCD. Because the QCD rules are no long temporary, one would think the IRS would now give serious consideration to assigning a special Form 1099-R code for the non-taxable QCD to expressly indicate the QCD is tax-fee.

Secondly, modified the Internal Revenue Code rules for making a roll over contribution into a SIMPLE-IRA. Under existing law, the only distribution which was eligible to be rolled over into a SIMPLE-IRA was if the distribution had come from another SIMPLE-IRA or the same SIMPLE-IRA. That is, it was impermissible for a person to rollover a distribution from a traditional IRA into a SIMPLE-IRA or from a 401(k) plan into a SIMPLE IRA, from a 403(b) plan into a SIMPLE-IRA or from certain other employer sponsored plans. The new rules are effective for distributions occurring on or after December 19, 2015.

Such distributions are now eligible to be rolled over into a SIMPLE-IRA as long as the individual has met the 2-year rule as set forth in Code section 72(t).

Presumably and hopefully, the IRS will be revising its two Model SIMPLE-IRA Forms (Form 5305-S and Form 5305-SA) because Article I of such forms provide, “In addition the trustee will accept transfers or rollovers from other SIMPLE-IRAs of the participant. No other contributions will be accepted by the trustee.” These forms were last revised in March of 2002 and as written do not allow for rollovers for distributions from any IRAs and plans other than another SIMPLE-IRA. CWF is revising its SIMPLE-IRA forms by adding this new rollover rule. Rollover certification forms will also need to be revised.

The IRS should also be issuing a revised Rollover Chart as set forth in Publication 590A.

Thirdly, a “technical” amendment was adopted extending the deadline for rolling over certain airline payment amounts. In the FAA Modernization and Reform Act, a person had been authorized to rollover certain airline payments received with respect to certain bankruptcies. The rollover had to be accomplished by August 4, 2012. Such rollover contribution was authorized and it was not subject to the annual contribution limit. The new tax law extends the deadline to be 180 days after December 18, 2015 or June 15, 2016.

The fourth IRA provision is discussed in the adjacent article discussing a new de minimis rule which creates a major exception so that an IRA custodian will be not be assessed the $250 penalty for an incorrect Form 1099-R.

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