During the Form 1099-R, Code Section 72(t) Project, the Employee Plans Compliance Unit (EPCU) found errors in reporting taxable distributions. In general, if you receive a distribution from a qualified retirement plan (including an involuntary cash-out), the part of the distribution you must include in income may also be an early distribution that’s subject to a 10% additional tax unless you qualify for an exception.
The EPCU reviewed Forms 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., marked as ‘Early distribution, no known exception’ (box 7, code 1). In most cases, these are distributions from a qualified retirement plan made to an individual under age 59½.
The EPCU then determined if the individuals reported on their Form 1040 tax returns the:
- taxable distributions, and
- additional 10% early distribution tax (IRC Section 72(t)).
We found almost 40% of the individuals made errors on their Form 1040 returns. Most individuals didn’t qualify for an exception to the 10% additional tax on early distributions. The EPCU requested these individuals to properly report the distributions by amending their returns.
If you receive a Form 1099-R with an amount in box 2a, “Taxable amount”, you must include this amount as income on your individual tax return. You must also report:
- the additional tax on early distributions on Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, or
- an exception to the additional tax on Form 5329, line 2. Only use code 12 for “Other” if you meet one of the exceptions for “Other” shown in the Form 5329 instructions.
If you take a hardship distribution from your retirement plan, you must pay the 10% additional tax on early distributions from qualified retirement plans unless you qualify for an exception.