Did I miss reporting a retirement transfer on my taxes?

I got a CP2000 for my 2022 taxes saying I owe a $7K penalty. Do I need to agree to it, or can I disagree and send in a 1040X to include a missing 1099-R?

Make sure to read the entire notice carefully.

Usually, you don’t need to send an amended return if you don’t agree with what they’re proposing.

Oakley said:
Make sure to read the entire notice carefully.

Usually, you don’t need to send an amended return if you don’t agree with what they’re proposing.

The CP2000 looks correct, but I’m missing info on a retirement account transfer. I really don’t want to pay $7K. How do I submit the 1099-R that shows the extra income I forgot to include originally?

@Lin
If the CP2000 is accurate, you do owe the tax listed. If you had included that income on your original return, you’d still owe unless they didn’t account for any withholding from the transfer.

Clovis said:
@Lin
If the CP2000 is accurate, you do owe the tax listed. If you had included that income on your original return, you’d still owe unless they didn’t account for any withholding from the transfer.

I had about $2K withheld.

@Lin
Is the IRS factoring in that $2K withholding in their figures? Was this an early distribution? Are they looking at a 10% early distribution penalty? Did you qualify for an exception to the penalty for any part of the distribution?

@Clovis
What was your other income in 2022? How much was the distribution? Did you file as single?

Clovis said:
@Clovis
What was your other income in 2022? How much was the distribution? Did you file as single?

My regular income was about $60K, and yes, I filed single.

Lin said:

Clovis said:
@Clovis
What was your other income in 2022? How much was the distribution? Did you file as single?

My regular income was about $60K, and yes, I filed single.

So your full-time income was $60K? How much did you take out from the 401K? Just noticed you mentioned this was an early distribution in another reply.

@Clovis
I took out $24K. I’m not close to retirement age at all.

Lin said:
@Clovis
I took out $24K. I’m not close to retirement age at all.

Okay, so the extra tax from that unreported income would look like this:

  • Original tax:
    • AGI = $60K
    • Taxable income = $60K - $12,950 = $47,050
    • Tax = $4,807.5 + 22% * (taxable income - 41,775) = $4,807.5 + 22% * (47,050 - 41,775) = $5,968
  • Tax with distribution:
    • AGI = $60K + $24K = $84K
    • Taxable income = $84K - 12,950 = $71,050
    • Tax = $4,807.5 + 22% * (71,050 - 41,775) = $11,248
    • 10% early distribution penalty = 10% * $24,000 = $2,400
    • Total tax + penalty = $11,248 + $2,400 = $13,488
  • Additional tax = tax with distribution - original tax = $13,488 - $5,968 = $7,520
    • Subtract $2K withholding = $7,520 - $2K = $5,520 unpaid tax.

It looks like the notice you got did account for the withholding from the distribution and the early distribution penalty. The difference between the $5,520 calculated here and the $7K on the notice likely includes penalties and interest, including a possible 20% accuracy-related penalty.

You might want to see if you can get the IRS to drop the penalties, but you’ll still owe the unpaid tax and any interest.

@Clovis
I can’t see this comment, can the admin help out?

Lin said:
@Clovis
I took out $24K. I’m not close to retirement age at all.

Just so you know, if you live in a state that has income tax, once you sort this out with the IRS, they’ll inform your state about the additional income, and you might get a bill from them too.

@Clovis
Yes, it was an early distribution. I didn’t see anything about a 10% penalty assessment.

@Lin
If the assessment they proposed is right, go ahead and sign and date the agreed response page and send it back.

You can appeal the penalty for Reasonable Cause once you get the first notice demanding full payment.

To request the penalty removal, use Form 843:

@Oakley
What are my chances of not having to pay much, or anything near $7K when I appeal?

Lin said:
@Oakley
What are my chances of not having to pay much, or anything near $7K when I appeal?

Pretty much none. You’ll have to explain why you didn’t file a complete and correct return and pay the correct tax on time.

Make sure to mention that this is the first time you’ve had a situation like this. First Time Abate procedures don’t usually apply to that penalty, but it could help to include it.

@Oakley
Are we talking zero payment or zero chance I’ll have to pay the full amount? What’s the abatement form for?

Lin said:
@Oakley
What are my chances of not having to pay much, or anything near $7K when I appeal?

Not very likely if you didn’t include it on your return and you owe taxes on it.

Lin said:
@Oakley
What are my chances of not having to pay much, or anything near $7K when I appeal?

What exactly are you appealing? It seems like everything checks out.