Form 1099-R Errors

Robin Weingast Do OverThe Employee Plans Compliance Unit found errors on Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. during its International Foreign Distribution project. The project focused on individuals living outside the United States or its territories who received retirement plan or IRA distributions before reaching age 59 1/2.

Project results
Responses showed that Form 1099-R filers (payers, trustees or plan administrators) aren’t fully completing the recipient’s information on the form. Form 1099-R filers are required to provide the recipient’s identification number, name, street address (including apartment number), city, state and zip code (or postal index numbers). This information is critical in locating U.S. individuals (citizens and resident aliens) living outside the U.S. or its territories. Form 1099-R filers can avoid these errors by carefully following the Form 1099-R instructions.

Form 1099-R reporting requirements
Generally, a Form 1099-R is issued to each person to whom a distribution of $10 or more is made from pensions, annuities, profit-sharing and retirement plans (including section 457 government plans), IRAs, insurance contracts, etc.

By February 1 of the year following a distribution, the Form 1099-R issuer must file the form with the IRS and provide a copy to each individual who received a distribution.

The form must show both the gross and taxable amounts of the distribution and the total federal income tax withheld during the year. Generally, U.S. income tax must be withheld on distributions delivered outside the U.S. or its territories. However, a U.S. citizen or resident alien can choose not to have tax withheld if their address is in the U.S. or its territories.

IRS may assess penalties under Internal Revenue Code sections 6721 – 6723 when filers submit inaccurate or incomplete information reports.

Fixing Form 1099-R errors
Filers can fix errors by issuing a corrected Form 1099-R. Make sure to correct it as soon as possible and file Copy A and Form 1096 (transmittal) with your IRS Service Center. Also, furnish statements to the recipients showing the correction.

Treasury Inspector General for Tax Administration’s report
The Treasury Inspector General for Tax Administration’s 2011 report noted the level of inaccuracies in information returns, including Form 1099-R. The report stressed the importance of accurate information return reporting by third parties as a way of encouraging a high level of voluntary tax compliance.

The report further noted that information returns with inaccurate names and taxpayer identification numbers create opportunities for individuals to underreport income and avoid IRS scrutiny. Those individuals taking advantage of such opportunities can create an unfair burden on other taxpayers and diminish the public’s respect for the tax system. This is important because the tax gap — the difference between what taxpayers should have paid and what they actually paid on a timely basis — was an estimated $385 billion in 2006.

When a Form 1099-R issuer omits identifying information from any information return, it’s more difficult for the IRS to conduct compliance checks and examinations. The report stated that, although the IRS is able to correct a large number of inaccuracies, many information reports go uncorrected hampering compliance efforts and undermining the basis of our voluntary tax system.

Avoid  Form 1099-R Errors With Help From Robin S. Weingast and Associates
The IRS may assess penalties when filers submit inaccurate or incomplete Forms 1099-R. Why risk preparing these yourself?

Even accounting firms make mistakes. Have your Forms 1099-R prepared by Robin S. Weingast and Associates, Inc. Our team of experts will prepare your forms quickly and accurately. Contact us today for assistance. 

About the March 15 ADP/ACP Test

Robin Weingast Graph ImageWhat is the ADP/ACP Test?
The ADP/ACP test, which stands for Actual Deferral Percentage/Actual Contribution Percentage, is a test that determines your plan’s equitability and ensures that all participants benefit in a non-discriminatory manner. More highly compensated employees—typically owners, executives, or upper level managers—may not benefit disproportionately from the plan’s 401(k) feature.

Why does ADP/ACP test matter?
In addition to being an IRS requirement, The ADP/ACP test is one of the more significant tests of the year because you will have to deal with the results of the test and be mindful of the test’s outcome for the entire year. Because of that, the plan sponsor will consistently be paying attention to the many factors that impact the test results.

In addition, missing the deadline can result in penalties if the adjustments, if required, are not made before March 15.

What impacts the ADP/ACP test?
The ADP/ACP Tests primarily exists to make sure that employers are not running 401(k) plans that primarily benefit owners and highly paid employees. For example, a plan may be either (a) structured to, or (b) in actual operation, provide disproportionally low benefits to rank and file employees. How? An example of a structural violation would be providing matching contributions only to those who contribute large amounts to the plan each year. Obviously, highly compensated employees are in a much better position to make such contributions. In this way, they are benefitting significantly more from the plan. An example of an operational violation would be high levels of employee participation by highly compensated employees and very much lower levels by rank and file employees.

The ADP/ACP Tests are set up to ensure that inequities between rank and file and owners/highly compensated, that exceed permitted IRS differentials, do not exist.

How does the ADP/ACP test do that?
Step one: Your employees are separated into two groups—highly compensated and non-highly compensated.

Step two: The ADP/ACP test evaluates the average contribution percent of each group. The average contribution percent of the non-highly compensated group directly controls the allowable average of the highly compensated.

What can I do to prepare for the ADP/ACP test?
Testing plans is a complex process, and the IRS requires many different kinds of tests for each plan.

At Robin S. Weingast and Associates, we focus on IRS Tax Qualified Retirement Plans that, when properly designed, will allow the business owner, family members, and even key employees to contribute higher amounts than the test would normally provide, if certain contributions are made by the employer to the plan.

These are called Safe Harbor contributions, and will allow the overriding of this test so that the highly compensated employees can indeed benefit to a greater extent.

Custom Designed Plans that Favor Owners, Officers and/or Highly Compensated Employees
Robin S. Weingast and Associates, Inc. specializes in custom designed plans that “legally discriminate” in favor of selected classes of owners/employees. These plans can be designed to maximize contributions to the selected class(es) while providing the minimum benefits that the law requires to all other plan participants.

The result is a highly effective and efficient retirement savings vehicle for the selected classes.

Our team can provide this value added service and is equipped to advise and conduct ADP/ACP tests, as well as the many other tests required by the IRS. If you would like a free consultation, please contact us, and we would be happy to work with you.