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Thursday, April 21, 2016

No Form 1099-R Prepared to Report IRA Funds Moving From the Decedent’s IRA to an Inherited IRA

Some mainframe software vendors just don’t understand the IRS procedures for reporting once an IRA accountholder dies. These mainframe software writers have incorrectly adopted the approach that the Form 1099-R is to be prepared when an inherited IRA is being established.

A Form 1099-R is prepared only if there is a reportable distribution. Establishing an inherited IRA involves transferring the IRA funds from the decedent’s IRA to one or more inherited IRAs. Such transfers are not to be reported on the Form 1099-R.

Preparing a Form 1099-R which is not required to be prepared is an incorrect form and will result in penalty. The penalty is now $250 (times 2) if an IRA custodian submits an incorrect Form 1099-R

It may not be the best way, but the IRS has the IRA custodian complete the Form 5498 in a special way to inform the IRS that the decedent’s IRA funds have moved to an inherited IRA for one or more beneficiaries. Using the title, “John Doe as beneficiary of Jane Doe,” informs the IRS that funds have been moved from Jane Doe’s IRA into a inherited IRA for John Doe. The Form 1099-R is not used for this purpose.

The software vendor is causing real problems for the individual if it prepares an incorrect Form 1099-R as he or she must explain the distribution on his or her tax return. A non-spouse beneficiary is unable to rollover a distribution from an inherited IRA Putting a 0.00 in box 2a does not make things better.

Posted by James M. Carlson at 14:57.50
Categories: Traditional IRAs