COVID distribution made on 10/27/2021?

[JRC]

I have a new client that received a distribution from their 401K  on Oct 27 and Dec. 8 of 2021. They reported the amount on Form 8915-F for 2021 and to be taxed over 3-years beginning in 2021 also exempt from the 10% early withdrawal penalty. They reported COVID as the Fema number for the Disaster and their reason was due to COVID and being laid off. Disaster Year check for 2020 and distribution/tax year for filing form 8915-F is 2021.

I can't find how this can be reported as a Qualified Disaster retirement Plan Distribution because it was distributed in 2021 and after also the June 25, 2021? I would have reported this as a Early Distribution in 2021 subject to the 10%.

Am I missing something here? thanks

[TaxGuyBill]

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@JRC wrote:

Am I missing something here?

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Yes, you are missing that the previous tax preparer was clueless.  😁

[IRonMaN]

I didn't prepare that return.  I can come up with witnesses if I have to 😨

[JRC]

It was self-prepared for 2021. 

I am looking for confirmation of my conclusion.

1: should I have them Amend the 2021 return to include in Income the full amount of distributions plus the 10% penalty?

2: prepare their 2022 return without the 1/3 distribution?

3: give them back their documents and pretend it never happened?

[IRonMaN]

I would flip a coin between number 1 and number 3.

[TaxGuyBill · Accepted solution]

If you prepare the 2022 return, yes, I would do it without the 1/3 distribution.

You should tell them of the 2021 error and tell them it should be amended.  You can't make them amend it and whether they do it or not won't affect the correct 2022 return.  But they should know that if they don't amend, the IRS will send notices (unsure if they will be for 2021 for doing it wrong, or 2022 for a supposedly missing 1/3 distribution).

If they don't amend and if you decide to prepare 2022, I would make sure that you have everything in writing and that they signed what you told them.  Otherwise, they could "throw you under the bus" and blame you when they receive IRS notices.

[JRC]

Thank you Taxguybill,

I will let them know of their error and proceed from there. Now I see that they will get a notice on the 1/3 missing from their return for 2022.  What a way to begin my 2022 Tax season.

Makes me wonder if they are shopping for a tax guy to agree with them.

Thanks again..

[IRonMaN]

To be serious for a minute (and I hate being serious), the amendment would be a key thing if I was in your slippers.  If they let me amend the 2021 return, that's a sign that they just didn't know what they were doing and are willing to do the right thing ------ they would be a keeper.  If they don't want to amend, time to throw them back in the lake for some other tax preparer to reel in.

[qbteachmt]

"Now I see that they will get a notice on the 1/3 missing from their return for 2022."

There was no covid-related distribution provision beyond the end of 2020.