- Hearing the initials "IRS" can make anyone feel queasy and uncomfortable. The tax forms and fact sheets can be extremely confusing to the average person when filing an income tax return. The same can be said for the boxes and subheadings included on the accompanying forms filed along with your 1040 each year. The 1099-R form is commonly misunderstood.
- When most people hear the term 1099, it is widely believed that its use is strictly for those who are self-employed or independent contractors for companies. Similar in style and format to a W-2, the 1099 form shows the amount of income a person made with from a particular company or for themselves, and is the form that the IRS uses to determine how much tax must be paid each year, because taxes were not deducted upfront by an employer. While similar in style to the normal 1099 form, the 1099-R has a much more specific purpose when it comes to tax reporting and filing.
- The 1099-R forms is used primarily to report distributions from a retirement account holder or trustee of an IRS-approved account. The IRS defines such approved accounts as Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts and the like. Each of these different accounts requires a separate 1099-R accounting form and is required to accompany the tax returns of the recipient. The purpose is to show that the IRS received their allotted and correct distribution for taxes accrued on these types of interest-bearing funds, if anything was taxable. Often, the income produced by these types of investments is under a hedge of protection from the IRS, but must be declared as income, because the responsibility of the IRS to ensure that the amounts from the investment and your claim are equal.
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One of the most common misconceptions of 1099-Rs is that many custodians don't believe they have to report rollover contributions to the IRS at all. The reality is that all rollovers have to be reported, regardless of the filing time or amount. If the rollover was done properly, it isn't normally considered taxable income, even though the amounts have to be reported to the IRS. The same holds true of direct rollovers as well, inasmuch as they must be reported to the IRS on the 1099-Rs, however, they are not considered taxable in most cases. Typically, not filing the correct amount can result in IRS collection actives, an audit or even revocation of the account contributions during that tax year. That means you could be taxed on all contributions made into an account that would otherwise be under the umbrella of protection from taxation.
Another very common mistake made with the 1099-Rs is simply not filing them at all, or not evaluating and double-checking the amounts reflected on the forms. This mistake can yield the same type of result as not reporting rollover amounts or income and can mean a partial loss of your funds if the IRS discovers the oversight. It's always best to review and verify your 1099-Rs prior to filing your taxes each year. - While 1099-Rs can seem complicated at first glance, you will become more accustomed with them. The IRS sets up free tax assistance centers around the United States and has a dedicated tax help line to assist you with these types of unfamiliar forms (see the IRS website below). Filing your 1099-Rs correctly the first time can save you time and money later.
