1099-R / 401K Trustee error?

A new client of mine rolled over a 401K to an IRA in TY2011.
The trustee for the 401K was a small 1-person shop that managed the plan for a few US employees of a Canadian company. Both the 401K and the rollover IRA were held at Fidelity Investments.
After the rollover the client asked the 401K trustee if he would receive 1099-R and the trustee said no because it was a direct rollover and both accounts were at Fidelity. Given he didn't receive the 1099-R, the client didn't report the rollover his Y2011 return. I believe this trustee is incorrect and a 1099-R should have been generated. I asked the client to ask the trustee to confirm no 1099-R was submitted to the IRS (just-in-case), and am waiting for a response but most likely the answer is NO.
Assuming the trustee should have generated a 1099-R what can be done to correct this problem?
Should the client file an amended return with the rollover included even if there's no corresponding 1099-R?
Reply to
aloy.parker
Last question first, I wouldn't bother filing an amended return if there is no change in tax liability. Wait to see if IRS sends a computer letter.
There definitely should be a Form 5498 issued to show the full rollover contribution to the IRA, which is your primary evidence that no tax was due.
The instructions for Form 1099-R distinguish between direct rollovers (issuance required) and transfers (issuance not required), but which one your scenario fits is still not clear to me. You could always either just report the rollover directly on the 1040, or use the Substitute W-2/1099-R form (I forget the number) with the tax return.
Reply to
Mark Bole
Assuming the IRS instructions for Form 1099-R are correct..... a direct rollover (trustee to trustee transfer from a qualified plan such as a 401(k) to an IRA must be reported on a 1099-R. See below:
However, you must report: Recharacterized IRA contributions; Roth IRA conversions; Direct rollovers from qualified plans, section 403(b) plans or governmental section 457(b) plans, including any direct rollovers from such plans that are IRRs or are qualified rollover contributions described in section 408A(e); and Direct payments from IRAs to accepting employer plans.
Reply to
Alan
I didn't see anything where "direct rollover" was based on "trustee to trustee". Does a "direct rollover" mean a distribution to the taxpayer, who then rolls it over within 60 days? Or put another way, wouldn't any trustee-to-trustee transfer be *not* considered a direct rollover? IRA-to-IRA, trustee-to-trustee, is exempt from reporting, but it's 401(k)-to-IRA, trustee-to-trustee, that I'm not clear on.
Reply to
Mark Bole
I am 99.4% sure that the use of the term "direct rollover" in this instance means a trustee to trustee transfer to avoid the mandatory 20% withholding. From another IRS site:
You can choose to have the payer transfer a distribution directly to another eligible retirement plan or to an IRA. Under this direct rollover option, the 20% mandatory withholding does not apply.
Reply to
Alan
I think it's clear that in this case that the trustee-trustee direct 401k to IRA rolloever should have required a 1099-R (as commented above). I did receive confirmation that the 401K trustee didn't send any 1099-R to the IRS either. So the specific question is whether any prudent action is necessary with respect to the TY2011. Should the 2011 return be ammended to include the entirely non-taxable rollerove amount on 1040 lines 15, or rather is it reasonable to just ignore it for now unless an IRS letter is recieved (as suggested above). If it makes a difference the client is a high-income individual and has other factors which make him a higher risk for audits.
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Reply to
aloy.parker
If it was my return, I would do nothing. There is no change in tax liability and there is no carryforward or carryback items that need to be addressed.
Reply to
Alan
Right now there is a rollover IRA and the IRS has no record of where the funding came from. If the IRS data matching system ever notices this discrepancy they may treat it as an excess contribution and send a big bill. Admittedly, this scenario seems low probability. Without ammending the return, I have doubts about whether the Statute of Limitations clock that applies to the rollover has started. If you don't ammend the TY2011 return, keep proof about the 401K to IRA rollover forever. Clearly, I am more paranoid than most. I would ammend.
Reply to
BignTall
I just realized that there was another part of the instructions that makes it clear:
"If part of the distribution is a direct rollover and part is distributed to the recipient, prepare two Forms 1099-R."
Reply to
Alan
The trustee must prepare Form 5498 by June 1 for each person that has an IRA they administer. They must report in Box 2 the amount of any direct rollover from a qualified plan to that IRA. A copy goes to the IRA owner. I would ask the client whether the 5498 for 2011 was received in 2012 with the amount in Box 2 reflecting the direct rollover.
Reply to
Alan
Alan repeated what was already pointed out in the first reply of this thread, namely the Form 5498 is in fact a record (I'd argue the more important one) of where the funding came from.
What "SOL clock that applies to the rollover" are you referring to?
Reply to
Mark Bole

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