Form 1099-R Errors
The Employee Plans Compliance Unit found errors on Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. during its International Foreign Distribution project. The project focused on individuals living outside the United States or its territories who received retirement plan or IRA distributions before reaching age 59 1/2.
Responses showed that Form 1099-R filers (payers, trustees or plan administrators) aren’t fully completing the recipient’s information on the form. Form 1099-R filers are required to provide the recipient’s identification number, name, street address (including apartment number), city, state and zip code (or postal index numbers). This information is critical in locating U.S. individuals (citizens and resident aliens) living outside the U.S. or its territories. Form 1099-R filers can avoid these errors by carefully following the Form 1099-R instructions.
Form 1099-R reporting requirements
Generally, a Form 1099-R is issued to each person to whom a distribution of $10 or more is made from pensions, annuities, profit-sharing and retirement plans (including section 457 government plans), IRAs, insurance contracts, etc.
The Form 1099-R issuer must:
- file the form with the IRS, and
- provide a copy to each individual who received a distribution.
The form must show both the gross and taxable amounts of the distribution and the total federal income tax withheld during the year. Generally, U.S. income tax must be withheld on distributions delivered outside the U.S. or its territories. However, a U.S. citizen or resident alien can choose not to have tax withheld if their address is in the U.S. or its territories.
IRS may assess penalties under Internal Revenue Code sections 6721 – 6723 when filers submit inaccurate or incomplete information reports.
Fixing Form 1099-R errors
Filers can fix errors by issuing a corrected Form 1099-R. Make sure to correct it as soon as possible and file Copy A and Form 1096 (transmittal) with your IRS Service Center. Also, furnish statements to the recipients showing the correction.
Treasury Inspector General for Tax Administration’s report
The Treasury Inspector General for Tax Administration’s 2011 report noted the level of inaccuracies in information returns, including Form 1099-R. The report stressed the importance of accurate information return reporting by third parties as a way of encouraging a high level of voluntary tax compliance.
The report further noted that information returns with inaccurate names and taxpayer identification numbers create opportunities for individuals to underreport income and avoid IRS scrutiny. Those individuals taking advantage of such opportunities can create an unfair burden on other taxpayers and diminish the public’s respect for the tax system. This is important because the tax gap — the difference between what taxpayers should have paid and what they actually paid on a timely basis — was an estimated $385 billion in 2006.
When a Form 1099-R issuer omits identifying information from any information return, it’s more difficult for the IRS to conduct compliance checks and examinations. The report stated that, although the IRS is able to correct a large number of inaccuracies, many information reports go uncorrected hampering compliance efforts and undermining the basis of our voluntary tax system.
We’ll post a summary of the International Foreign Distributions project to our Web page. If you have questions about how the EPCU International Foreign Distribution project relates to your retirement plan, email us and include “International Foreign Distributions” in the subject line.