1099, More Code 1s and fewer Code 2s

L1: 1099, More Code 1s and fewer Code 2sFrom David Zales, dlzallestaxes – keeping us up to date…

ACCORDING TO THE 2015 INSTRUCTIONS FOR FORM 1099-R :
If two or more other numeric codes are applicable, you must file more than one Form 1099-R. For example, if part of a distribution is premature (Code 1) and part is not (Code 7), file one Form 1099-R for the part to which Code 1 applies and another Form 1099-R for the part to which Code 7 applies. In addition, for the distribution of excess deferrals, parts of the distribution may be taxable in 2 different years. File separate Forms 1099-R using Code 8 or P to indicate the year the amount is taxable.
Even if the employee/taxpayer is age 59_ or over, use Code 1 if a series of substantially equal periodic payments was modified within 5 years of the date of the first payment (within the meaning of section 72(q)(3) or (t)(4)), if you have been reporting distributions in previous years using Code 2.
For example, Mr. B began receiving payments that qualified for the exception for part of a series of substantially equal periodic payments under section 72(t)(2)(A)(iv) when he was 57. When he was 61, Mr. B modified the payments. Because the payments were modified within 5 years, use Code 1 in the year the payments were modified, even though Mr. B is over 59_.
If you do not know that the taxpayer meets the requirements for substantially equal periodic payments under section 72(t)(2)(A)(iv), use Code 1 to report the payments.

Since an IRA Custodian has no real method of validating valid SEPP payments, most custodians will probably discontinue using 1099 code 2 in favor of code 1 which would then require a tax payer to file form 5329.2016-01-06 12:06, By: Gfw, IP: [205.178.65.222]

L2: 1099, More Code 1s and fewer Code 2sYes, this provision has been in the 1099R Inst for years. The IRA custodian would use Code 1 if they recognized the taxpayer was participating in a SEPP, but chose not to underwrite the accuracy of the calculations or possible inclusion of other IRA accounts. However, if the custodianadopted the positionof totally ignoring the existence of a SEPP altogether, they would use code 7 after 59.5. It has not been clear how many custodians would opt for the code 1 vs. code 7 in this situation. It would be preferable if the IRS clarified their expectations of the custodian’s review of a SEPP plan rather than treating the custodian’s responsibility as optional as they have for years.
One poster just stated that a Schwab rep indicated that the IRS directed them to stop providing the 2 code. It is not clear whether this actually occurred or if the rep was using the IRS as an excuse for the custodian’s change of policy. Schwab was probably the largest custodian who has been offering the 2/7 coding combination in the past.
2016-01-07 00:29, By: Alan S, IP: [160.3.87.235]