How to Fix ‘Misleading’ Reporting on Your Form 1099-R

Your 1099-R tells the IRS a story about your IRA distributions. But what if the story is not true?

If a distribution was made from your IRA during 2024, your IRA custodian must send you a Form 1099-R for that transaction by Jan. 31. Form 1099-R information is also shared with the IRS and explains how much you withdrew and whether the amount is taxable. However, in some cases, the information might be misleading, requiring corrections to be made when it is reported on your tax return. Following are common scenarios where the 1099-R might be misleading and how you can ensure corrections are made.

Box 2a and Nontaxable Distributions From Your Traditional IRA

If you have aftertax amounts in a traditional IRA, simplified employee pension IRA, or Simple IRA, distributions generally include a prorated amount of aftertax (nontaxable) and pretax (taxable) amounts. However, your IRA custodian must report that the entire distribution is taxable. Why? Because they don’t have the necessary information to determine whether your IRA contains aftertax (nontaxable) contributions.

Your IRA custodian performs this reporting by including the full amount of your traditional IRA distribution in Box 1: Gross Distribution and Box 2a: Taxable Amount of your 1099-R. If your traditional IRA contains aftertax amounts, only a portion of the distribution would be taxable, and this reporting could mislead your tax preparer into thinking that the entire distribution is subject to income tax.

To allow for any required correction, your IRA custodian must check Box 2b: Taxable Amount Not Determined, leaving room for the taxable and nontaxable portions to be properly calculated while preparing your tax return. This calculation is done on IRS Form 8606. Failure to file Form 8606 could result in paying taxes on nontaxable amounts and may also subject you to an IRS penalty of $50.

Important reminders:

• All your traditional IRAs, SEP IRAs, and Simple IRAs are aggregated and treated as one traditional IRA when calculating how much of your distribution is taxable.
• Some distributions, such as qualified charitable distributions (see below), are not subject to the pro rata treatment.

60-Day Rollover Reporting

Any rollover-eligible portion of a distribution from your IRA or employer plan account that is rolled over within 60 days is excluded from your income. However, even if you complete a rollover within the 60-day window, your IRA custodian is still required to issue a 1099-R for the amount distributed. It would then be the responsibility of your tax preparer to report the distribution as being nontaxable because it was rolled over. This nontaxable treatment is accomplished by doing the following on your tax return:

• Report the gross distribution amount on line 4a—IRA distributions.
• Input only the amount not rolled over, if any, on line 4b—taxable amount.
• Enter “rollover” next to line 4b, so the IRS knows that the amount excluded from Line 4 is excludable from income because it was rolled over.

Failure to report the rollover correctly could result in the IRS assuming the amount is taxable, leading to an incorrect assessment of taxes and penalties.

Qualified Charitable Distributions

If you made a qualified charitable distribution from your IRA, it is excluded from your income, except for amounts representing deductible traditional IRA contributions. However, your IRA custodian is required to report QCDs as regular distributions on your 1099-R. Your tax preparer can override this misleading report by excluding the QCD from your taxable income on your tax return and indicating that the amount qualifies as a QCD. The process is similar to how a rollover is reported (see above), except that “QCD” is entered beside Line 4b.

Box 7: Code 1—Early Distribution With No Known Exception

Distributions made before you reach age 59½ are subject to a 10% additional tax, unless the amount qualifies for an exception. Some of the exceptions your IRA custodian may acknowledge and report include distributions made due to death, disability, or as part of a direct conversion from a traditional IRA to a Roth IRA. When one of these exceptions applies, your IRA custodian is required to indicate the exception by entering the appropriate exception-qualifying code in Box 7 Distribution code(s) of your 1099-R.

However, your IRA custodian may not use an exception-qualifying code for certain exceptions, such as for distributions used for qualifying medical expenses, health insurance premiums, higher education expenses, or first-time home purchases. In such cases, your IRA custodian will input a Code 1—Early Distribution With No Known Exception in Box 7, which indicates that, as far as they know, there is no exception to the 10% additional tax.

If you qualify for an exception, but your IRA custodian inputs Code 1 in Box 7 of your 1099-R, your tax preparer must file IRS Form 5329 to override the Code 1 and claim the exception.

Misleading Does Not Mean Incorrect

A misleading 1099-R doesn’t mean that your IRA custodian made a mistake, provided they followed the IRS’ instructions for completing your 1099-R. For example, if you took a distribution before reaching age 59½ but while terminally ill, the amount qualifies for an exception to the 10% additional tax on early distributions. However, your IRA custodian must report it as Code 1—Early Distribution With No Known Exception. In such cases, your tax preparer must take the corrective steps to override the Code 1.

For true mistakes, such as issuing a 1099-R when none should be issued, you must contact your IRA custodian and request a correction.

Be sure to provide your tax preparer with all the relevant details about your IRA or employer plan distributions, including information about aftertax contributions, rollovers, QCDs, and any potential exceptions to early distribution penalties.

Help Your Tax Preparer to Get It Right

Your 1099-R might be available online at your IRA custodian’s website before Jan. 31. Check it early for accuracy and notify your IRA custodian if you find any mistakes.

Provide your tax preparer with a copy, and give them detailed information about transactions that could affect the taxability of your distribution, such as deductible IRA contributions, rollover contributions, whether the distribution was used for tax-free purposes such as QCDs, and whether the amount qualifies for an exception to the 10% additional tax that is not reported on the 1099-R.

Please note: The rules covered here are not exhaustive. Additional rules apply to distributions from Roth IRAs and employer plans and other transactions not covered in this article.