Have a Tax Question? Ask a Tax Expert
Hi Michelle and welcome to Just Answer!When your husband defaulted on the loan? Was that in 2010?
The issue is that defaulted loan from 401k is deemed distribution... and is treated as taxable income - so in general the administrator is correct.What is arguable - in which year that deemed distribution should take place.If he defaulted in 2006 - form 1099R should be issued for 2006 - and not for 2010.
So - while you may not argue deemed distribution. I suggest arguing that form 1099R was issued in 2010.The reason is that the IRS has three years statute of limitation to assess additional tax liability. That means - while they may assess tax liability for 2010 - the IRS would not be able to assess any liability for 2006.Your problem is that your husband ignored that reporting and did not timely object reporting - but the company is closed now - and there is no one to file a complaint.
What you need to do now - file a formal letter that the form 1099R was incorrectly issued for 2010 and send via certified mail to the company or to whoever took over. You will use that as an argument that you tried to resolve the issue. If you do not receive any response within sufficient time to file - reply to the IRS - address is on the note that form 1099R was incorrect and provide all information as you posted here.You should attach copies of statements and other documents (do not send originals!) While it is not required - I also suggest having a local CPA or Enrolled Agent representing you with the IRS.
Let me know if you need any help.
But if there is a statute of limitations in them reporting it do we even have to pay it? If the IRS accept your position that 1099R should be issued in 2006 - and assuming his 2006 tax return was timely filed - no need to pay these tax liability because of the statute of limitation run out.Shouldn't they have sent the 1099 in 2006?
If he defaulted in 2006 – yes – this deemed distribution should be reported for 2006.
Aren't they responsible for doing that?
Yes – the administrator of his 401k is responsible.
Or was he expected to call them if he never got it in 2006?
Generally – yes – taxpayers are required to report taxable income regardless if it was reported to the IRS or not.
I think I'm going to respond to IRS that no loan was taken outing 2010 so there was /is nothing to report and then they will have to go back to the company to prove it and they won't be able to?
The issue is not WHEN the money were taken from 401k plan, but WHEN he defaulted. When the loan was defaulted – the outstanding balance deemed distribution.
Your only argument – as I see might be that it was 2006 income and not 2010 income.
Btw we did call the company in 2010 and object to the 2010 1099 and the lady responded too badly she was reporting it to the IRS anyway and we could deal with them.If you have documental evidences of your communications - please be sure to attach copies to your response to the IRS collection letter.If you communicate via the phone - please tell the IRS in your letter - date and time of your communications, names of persons, and brief description of the communication.
I am glad to be helpful. Please be sure you accept the answer. Experts are only credited if the answer is accepted.If you need any clarification - be sure to come back.