Tax Preparer Documentation for Indirect Rollover and QCD

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Electron
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Tax Preparer Documentation for Indirect Rollover and QCD

Post by Electron »

What are the correct documents to submit to a Tax Preparer to support an Indirect Rollover (IRA to IRA) and also a QCD?

I've been working with another individual who discovered the hard way that Form 1099-R does not document an indirect rollover. The question about the QCD is a separate subject and asked for reference only.
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sport
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Re: Tax Preparer Documentation for Indirect Rollover and QCD

Post by sport »

The only documentation that exists for a QCD are your personal records and a letter of receipt from the charity. The 1099 just includes it as part of your ordinary distributions.
kaneohe
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Re: Tax Preparer Documentation for Indirect Rollover and QCD

Post by kaneohe »

perhaps you are asking 2 questions here? I don't know how professional tax preparers work but volunteer Tax-Aide folks are trained not to be an arm of the IRS. You ask questions and if the taxpayer understands the question after being told that they are responsible for the tax return, then the answer is accepted if believable.
So a reasonable and credible answer that the rollover was made within 60 days and that only one such rollover was made in the last 365 days would be enough.

IRS however might want to see account statements showing the timing of the distributions and the rollover acceptance and perhaps other distributions and their destination within the last 365 days. The tax preparer
might also ask for the same type of info if he was on the other side of the spectrum.
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HueyLD
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Re: Tax Preparer Documentation for Indirect Rollover and QCD

Post by HueyLD »

Electron wrote: Tue Aug 25, 2020 12:02 pm What are the correct documents to submit to a Tax Preparer to support an Indirect Rollover (IRA to IRA) and also a QCD?

I've been working with another individual who discovered the hard way that Form 1099-R does not document an indirect rollover. The question about the QCD is a separate subject and asked for reference only.
Yes, a good tax preparer should ask for such information.

For indirect rollovers, you need a statement showing the withdrawal date and amount from the old IRA and a statement with the deposit date and amount into the new IRA. And of course you can only do one indirect rollover over a 12-month period.

For QCDs, you need an acknowledge from the charity.
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Electron
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Re: Tax Preparer Documentation for Indirect Rollover and QCD

Post by Electron »

Thanks sport, kaneohe, and HueyLD for the help.

This was a case where an individual took their RMD and several QCDs early and forgot to turn off their automatic RMD which processed later in the year. The second RMD amount was then rolled back into the IRA within 60 days. Without additional documentation, I believe everything on Form 1099-R looks taxable to the tax preparer.

I was just wondering what should have been submitted to the tax preparer for the rollover such as an IRA statement.

The QCD was a separate subject and just asked for reference. I'm guessing that a copy of the QCD checks or cover letters should be fine. This also makes me wonder if brokerage firms such as Vanguard provide QCD check images in the online account similar to checks written on money market funds.
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celia
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Re: Tax Preparer Documentation for Indirect Rollover and QCD

Post by celia »

Electron wrote: Tue Aug 25, 2020 1:48 pm The QCD was a separate subject and just asked for reference. I'm guessing that a copy of the QCD checks or cover letters should be fine. This also makes me wonder if brokerage firms such as Vanguard provide QCD check images in the online account similar to checks written on money market funds.
OP, Even with this further information, the same answers above still apply.

Bogleheads make a copy of the QCD check before it is given to the charity and the charity should send you an acknowledgement. Just above my QCD checks I write "Please send me an acknowledgement of this one-time donation" in red ink. (Charities are not required to acknowledge donations under $250, but they often do so you have another reminder to keep them in mind. If you don't get an acknowledgement, ask for one again.) Vanguard will not have as copy of the check, as far as I know.

As far as the rollover, you need to tell the IRA custodian that the money is a rollover, else they will count it as a contribution and that will make it that much less you can contribute for the year. The contributions and rollovers should be shown on Form 5498 that you received in May of the year following the year in question (or in August if the rollover was done in 2019--since 2019 taxes were due in July).
kaneohe
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Re: Tax Preparer Documentation for Indirect Rollover and QCD

Post by kaneohe »

Electron wrote: Tue Aug 25, 2020 1:48 pm ................................................
The QCD was a separate subject and just asked for reference. I'm guessing that a copy of the QCD checks or cover letters should be fine. This also makes me wonder if brokerage firms such as Vanguard provide QCD check images in the online account similar to checks written on money market funds.
I take my QCDs from a separate account so the letter of instruction to the broker, and the check stubs, and the charity receipts all match up. I don't know if the online account has check images but seems like the other info should be sufficient.
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Re: Tax Preparer Documentation for Indirect Rollover and QCD

Post by Alan S. »

You are providing the 1099R forms to the tax preparer. Unless you are also submitting the preparer's organizer data that you feel is very clear with respect to QCDs and rollovers, it makes sense to staple an explanation of how much was rolled over and how much of the 1099R was a QCD.

That way, the preparer has this right in front of him when the 1099R is being entered into the tax program, and this is the best chance that the preparer will not overlook the rollover or QCD. Most likely, the IRS will not inquire further unless the receiving custodian fails to issue a 5498 reporting the rollover contribution.

In this situation the taxpayer did a 60 day rollover that was subject to the one rollover per 12 month limitation UNLESS that rollover was done after Notice 2020-51 was issued. In that case, the rollover will not count toward the one rollover limit. The taxpayer should make some detailed notes right now whether that rollover used up the one rollover limit or will not be counted due to Notice 2020-51, and act accordingly for the 12 months following the distribution that was rolled back.
BogleTaxPro
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Re: Tax Preparer Documentation for Indirect Rollover and QCD

Post by BogleTaxPro »

Speaking as both a professional tax preparer...and a Tax-Aide volunteer... 8-)

Although it helps (a bunch) if you have all the documentation when you see us, we don't "require" proof. We mostly ask for this for two reasons:
1. So neither you nor I miss something.
2. So if the IRS sends you a letter asking for the proof, you'll already have it handy.

So for the QCD, as others have suggested...make copies of the check/cover letter/acknowledgement.
For the rollover, as Celia (and others) said...make sure the custodian you are rolling to knows it's a rollover and not a contribution. It will be then be reflected on the 5498 but you won't receive that until after tax time, normally. And since those have been known to go astray, I keep copies of the account statement(s) that show both sides of the rollover.
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Electron
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Re: Tax Preparer Documentation for Indirect Rollover and QCD

Post by Electron »

Thanks all for the additional information. I posted these questions in part as a lessons learned exercise for the affected individual. Federal and state tax returns are being amended and that could easily have been avoided.

It appears that incomplete documentation was submitted to the tax preparer and important information not communicated. Two 1099-R forms were submitted and the tax preparer only saw Code 7 for Normal Distribution. I happened to catch this by chance saving the taxpayer a significant amount of money. A rollover representing an unintended second RMD was being taxed. A single IRA statement would likely have prevented the problem since the money was rolled back into the same IRA. It also looks like the taxpayer did a very poor job in checking the tax return. As a side note, Form 5498 was sent out in late July this year.

It is unfortunate that Vanguard apparently does not post online images of QCD checks. In the case of checks written on money market funds, those checks represent share redemptions. The online image is a nice record and it shows both sides of the check. In theory, Vanguard could post an image of a QCD check after it was printed or after it was cashed or both. That would be a very nice record with information from both sides of the check.
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Re: Tax Preparer Documentation for Indirect Rollover and QCD

Post by kaneohe »

Sounds like the lesson is that you can't make things bulletproof if the taxpayer does not know what he does not know. Also that the taxpayer is very fortunate that you are involved. Can't be sure but it sounds like the documents were just provided to the preparer so there was not extensive face-to-face communication ? If true, that would make it much easier to have misunderstandings of the important facts.

The 1099-R has that infamous box 2b (taxable amount not determined) which almost always should be checked so
that provides opportunities to go astray. Even with face-to-face communications, you often get blank looks when you ask if there are any reasons to believe the distribution is not taxable esp. when you are asking about basis
(non-deductible contributions).

I would expect that you can't just request the taxpayer to be clearer when communicating w/ the tax preparer.
You would have to be very specific about what to communicate about each specific situation.
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Re: Tax Preparer Documentation for Indirect Rollover and QCD

Post by Electron »

kaneohe wrote: Tue Aug 25, 2020 11:23 pmCan't be sure but it sounds like the documents were just provided to the preparer so there was not extensive face-to-face communication?
There was probably no face-to-face meeting as there was an established relationship between the taxpayer and a CPA firm. Things had gone smoothly before so the status quo probably prevailed. It sounds like the only inputs were a questionnaire and the usual tax documents. A one time indirect rollover appears to be a special case not expected by the tax preparer and not understood by the taxpayer.

A proactive tax preparer might have noticed and questioned the much larger IRA withdrawal compared with the previous year. That could have caught the indirect rollover. In addition, current year estimated tax payments would not need to be increased.
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