Not understanding 1099R, 401K loan

Principal plus unpaid interest?

That is what they claim, but why would unpaid interest be deemed a distribution? I understand paying the tax and penalty on money I withdrew since tax was never paid on it previously, but accrued interest is not money that I ever received. I just don't understand it I guess. So the benefits company screws up, doesn't issue the 1099 in the correct year, adds a bunch of interest to the loan and I wind up with a larger tax burden...there just isn't any logic there.

You you only took out 13k, but they claim you took out 14k (of which

I've had several phone calls with them but they are not particularly cooperative. They claim that it is normal to add on accrued interest, which in this case is $2K. Since this mysterious accrued interest is not money I ever received from my pre-tax 401K, I'm not sure why the IRS would expect me to pay income tax on it.

One option is to amend your 2005 tax return to reflect the distribution as it should have been reported at that time, and then attach a statement to your 2007 return explaining that the 1099-R was previously accounted for.

However, you would then have a two-year-overdue tax payment to the IRS for 2005 which would be subject to interest. Having a two-year grace period on paying your full tax, and avoiding amendments and attachments, might be sufficient to overcome the extra tax and penalty on the accrued interest.

-Mark Bole

But if he never received this 1k interest why should he pay taxes on it?

To original poster: Where is the 1k now? Is it still in the account, but maybe bigger now? Try to look at your monthly, quarterly, or annual statements over the years to track where this 1k is.

Sorry, I don't understand.

If he amends the 2005 return to reflect what the outstanding loan balance was at that time, he won't.

I assume he has not been continuing loan payments after he left the job. The interest is accrued, not actually paid.

He says his former employer screwed up by issuing the 1099-R two years late. So, if they had issued it on time, for tax year 2005, he would have paid tax and early distribution penalty on or before mid-April

-Mark Bole