Did VG make a mistake on my 1099R?

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rtom
Posts: 25
Joined: Sun Apr 19, 2015 7:59 am

Did VG make a mistake on my 1099R?

Post by rtom » Thu Nov 08, 2018 10:50 pm

In April 2015 I stupidly made an ineligible contribution to my traditional IRA at Vanguard. (I was abroad and had not enough earned income that year.)

I realized the mistake in February 2016 and contacted Vanguard. I had to make the request for the distribution by phone. The distribution was made in early February 2016, before the April 2016 deadline for filing.

The relevant IRA had a negative yield for the relevant time period, so there was no gain.

On my 2015 return I described the corrective distribution in a cover letter, and also included the distribution on line 15a, saying none of it was taxable.

A year later, I also reported the distribution on my 2016 tax return and entered zero as the amount taxable.

Today I got a letter from the IRS saying that I owe about $1800 in tax and penalties for this "early" distribution (I am under 59).

So I went back and looked at the 1099-R from Vanguard which I received in Jan 2016, It does indeed state that the full distribution is taxable (box 2a is $6500) and box 7 describes it as an early distribution. I never noticed that before.

My recollection is that if I got VG to do this corrective distribution before the April 2016 deadline, the distribution would not be taxable.

Therefore I believe the 1099R from VG is in error -- none of it should be taxable, and box 7 should say something else.

Unfortunately, since I was forced to make the original request by phone, I don't have much of a paper trail for this request I made from VG.

But let me check with you guys now --

Am I right that the distribution should not be taxable, and that VG made a mistake in their 1099R?

If I'm right about this, I will obviously call VG tomorrow. Any advice on how to talk to them would be appreciated.

Katietsu
Posts: 1625
Joined: Sun Sep 22, 2013 1:48 am

Re: Did VG make a mistake on my 1099R?

Post by Katietsu » Thu Nov 08, 2018 11:51 pm

Your understanding of the 1099-R is correct.

The situation doesn’t sound great to me. It seems as though it went through as a ordinary withdrawal. The 1099-R indicates this and so does the $6500 amount. The amount of the corrective distribution would be for the contribution plus associated earnings. If there was a loss then it would be less than $6500 not exactly $6500. With no paperwork and the time that has passed, I am not sure if you will have much luck having the 1099-R changed. Hopefully, someone will come along here with a good suggestion for you.

123
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Re: Did VG make a mistake on my 1099R?

Post by 123 » Fri Nov 09, 2018 12:14 am

After briefly looking over the preparation instruction for for 1099 https://www.irs.gov/pub/irs-pdf/i1099r.pdf it seems that the refund of contribution that the OP requested from Vanguard should have been treated as a Corrective Distribution (page 7) and likely should have been coded with distribution code 8 (page 17) Excess Contribution.

As a point of reference Vanguard currently has procedures/forms on their website to remove excess contributions http://vanguard.com/pdf/s373.pdf However the OP's issue pertains to correcting tax reporting for actions previously completed.
The closest helping hand is at the end of your own arm.

rtom
Posts: 25
Joined: Sun Apr 19, 2015 7:59 am

Re: Did VG make a mistake on my 1099R?

Post by rtom » Fri Nov 09, 2018 8:38 am

OP here.

I can't remember exactly why I was not able to request the corrective distribution with a form (VG had such a form then). It might have something to do with the fact that I was living abroad when I made the request.

It's annoying that VG deletes old messages, too.

I do have a copy of a response to one of my messages (see below). It's mostly boilerplate, but it does include a name of a person who helped me.

Unfortunately I have no record of the phone conversation I had with VG in which I explained the situation and requested the corrective distribution.

I'll call them today and do my best.

I'd be curious to hear about anyone else's experiences with getting VG to correct similar mistakes.

===

Dear Mr. Wimberly:

Thank you for taking the time to contact us.

We are sorry for any difficulty experienced in trying to obtain the form.
You can request the excess removal by phone. Please call us at the number
at the bottom of this email and ask to speak to a retirement specialist.

Although we are not able to advise you on whether or not you should remove
an excess IRA contribution, we can inform you of your options.

To avoid a 6% federal penalty, you must remove the excess contribution by
the correction deadline which is generally your tax filing deadline. If you
have already filed your tax return or filed for an extension by the
deadline, the IRS allows you an automatic six-month extension for removing
an excess contribution, typically ending on October 15. However, you must
file an amended tax return.

Vanguard(R) will report the excess contribution removal on IRS Form 1099-R
which is available the January following the year the removal took place.
You may also need to file IRS Form 5329 with the IRS. The related
instructions to IRS Form 8606 and IRS Form 5329 contain additional
information on your requirements to file.

Your options for correcting an excess contribution are:

* Remove the excess and any attributable earnings before the deadline. You
will not be subject to the 6% penalty.

* Remove the excess after the deadline. You cannot remove the attributable
earnings after the deadline has passed. You will be subject to a 6% penalty
tax on the amount of any excess each year it remains in your account. If
you have contributed to both a Roth and a traditional IRA, IRS regulations
require you to remove the excess from your Roth IRA first.

* Leave the excess amount along with any earnings in the IRA and apply it
to a later year. Vanguard will not change any account records or report any
additional information to the IRS. There is no need to notify Vanguard you
are selecting this option as you will be responsible for reporting the
information to the IRS. You will be subject to the 6% penalty on the excess
amount for each year that it remains in the IRA as an excess contribution.

If you have questions related to your specific situation, please consult
with a tax professional or the IRS.

If you have additional questions, please call Vanguard Voyager Select
Services(R) at 800-284-7245. You can reach us on business days from 8 a.m.
to 8 p.m. and on Saturdays from 9 a.m. to 4 p.m., Eastern time.

Sincerely,

Richard Aubin
Registered Representative
Vanguard Retail Investor Group

Alan S.
Posts: 7806
Joined: Mon May 16, 2011 6:07 pm
Location: Prescott, AZ

Re: Did VG make a mistake on my 1099R?

Post by Alan S. » Fri Nov 09, 2018 1:47 pm

It's unlikely they will re issue the form this late. The distribution of exactly 6500 suggests that you might have requested a distribution of 6500 instead of the specific 2015 contribution.


So you are probably stuck with the tax and penalty. However, your distribution of the 6500 excess amount in 2016 should be reported on your 2016 5329 which will eliminate the excess amount in 2016. But you will also owe the 6% excise tax in 2015 since the excess remained in the account at the end of 2016 and the 2016 removal did not include earnings and get the corrective distribution code.


To sum up, 6% excise tax on 2015 Form 5329.

No excise tax for 2016 if 5329 for 2016 filed correctly. Excess is cleared by the distribution which must be reported on your 2016 return and tax and penalty will be due on that 2016 distribution.

rtom
Posts: 25
Joined: Sun Apr 19, 2015 7:59 am

Re: Did VG make a mistake on my 1099R?

Post by rtom » Fri Nov 09, 2018 5:22 pm

OP here.

Have not yet had time to phone VG -- that will have to be tomorrow -- but even if they won't re-issue the 1099R, I am not inclined to just roll over and give the $1800 to the IRS, since it's VG who screwed up. I'll probably try to make such an argument to the IRS and see what happens.

BTW, the IRS doesn't give one a lot of time to respond -- only a month from the date they print the letter.

Very disappointed in VG -- might have to give the zero-cost Fidelity funds a look. Seems like I should have a little pull since I have a sizeable chunk of money in this IRA.

sawhorse
Posts: 3109
Joined: Sun Mar 01, 2015 7:05 pm

Re: Did VG make a mistake on my 1099R?

Post by sawhorse » Sat Nov 10, 2018 1:15 am

rtom wrote:
Fri Nov 09, 2018 5:22 pm
OP here.

Have not yet had time to phone VG -- that will have to be tomorrow -- but even if they won't re-issue the 1099R, I am not inclined to just roll over and give the $1800 to the IRS, since it's VG who screwed up. I'll probably try to make such an argument to the IRS and see what happens.

BTW, the IRS doesn't give one a lot of time to respond -- only a month from the date they print the letter.

Very disappointed in VG -- might have to give the zero-cost Fidelity funds a look. Seems like I should have a little pull since I have a sizeable chunk of money in this IRA.
You might want to wait until a weekday during regular business hours to call them. Vanguard customer service is hit or miss on weekdays. On weekends and evenings it's usually miss in my experience for anything other than the most basic things.

Vanguard has messed up my 1099 two times in the past 7 years. Both times they caught the mistake and sent me a correct one, but one time it wasn't until shortly before the tax deadline. Luckily I procrastinated that year. If I had filed my taxes early, I would have had to amend them.

rtom
Posts: 25
Joined: Sun Apr 19, 2015 7:59 am

Re: Did VG make a mistake on my 1099R?

Post by rtom » Sun Nov 11, 2018 6:35 pm


You might want to wait until a weekday during regular business hours to call them. Vanguard customer service is hit or miss on weekdays. On weekends and evenings it's usually miss in my experience for anything other than the most basic things.
Thanks sawhorse, good advice! I'll call on Tuesday.

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