Is the IRS mad at me?
February 19, 2008 8:00 AM   Subscribe

Good news! Going through some old paperwork I just found a check for $2,600 that I'd never cashed from 2003. Bad news! It was a rollover distribution from a 401K at Fidelity, made out to E-trade. Fidelity says they did file a 1099 in the year they cut the check. Am I screwed for the back taxes, plus penalties?

Apparently I had a notion to close out this account and consolidate the funds in a rollover IRA I have at E-trade. Never happened.

In the five years since, I've not heard anything from the IRS about this, despite the outstanding 1099 never being matched up by E-Trade with whatever form they file to show they got the $$ within 60 days.

I can't just unwind the whole thing and "decline" the check, as this was an employee 401(k) at Fidelity and they won't allow me to "add" to it. I explained it was never technically "withdrawn" but to them it was (the account still exists, with a zero balance). All they'll do is cut another check to the institution I name.

If I go that route I feel sure the IRS will match the distribution up with the deposit at E-trade and inflict all kinds of heinous penalties on me. What are my options?

I know you're not a tax advisor, but I don't think the $$ at stake here warrant paying an actual tax advisor. Maybe I'm wrong about that?
posted by stupidsexyFlanders to Work & Money (12 answers total)
Are you sure the check is even still valid? Many expire after a certain period of time, usually less than a year.
posted by DMan at 8:03 AM on February 19, 2008

Response by poster: Forgot to note this wrinkle: I'm I'm going to get dinged for all kinds of taxes/penalties as if I never rolled it over, can I even roll it over? Or is it now taxable money that I can put anywhere I want, ranging from my checking account to a rollover IRA on a contribution basis (that I can get a writeoff on)?
posted by stupidsexyFlanders at 8:05 AM on February 19, 2008

Response by poster: No, the check's not valid at all anymore, institutions would consider it stale-dated. Doesn't really affect the question though.
posted by stupidsexyFlanders at 8:05 AM on February 19, 2008

Where *is* the money at this moment? The check doesn't mean you have the money at your house. Even if the account at Fidelity has a zero balance, they have to have the money somewhere, right? Which would imply that you never, technically, withdrew it. I'd think.

Unless there's some kind of temporary holding account involved...
posted by amtho at 8:13 AM on February 19, 2008

Response by poster: I'm sure it's sitting in an account at the entity Fidelity uses to process distributions.
posted by stupidsexyFlanders at 8:20 AM on February 19, 2008

Since it never actually hit your hands, wouldn't you be liable for the taxes *this* year? I would guess that Fidelity would then have to create an amended 1099 for 2003.
posted by notsnot at 8:55 AM on February 19, 2008

The check was not made out to you, correct? The standard for rollovers is they are written from trustee to trustee with a notation of beneficiary. However, you need to make the deposit to the receiving account within 60 days.

Honestly, I'd see a tax professional with this one because the original trustee did not without the 20% taxes. Five years is a long while to own the IRS some coin even a small amount. Having a CPA do an amended return is probably worth the effort.
posted by 26.2 at 8:59 AM on February 19, 2008

without = withhold
posted by 26.2 at 9:00 AM on February 19, 2008

You need to find the 1099 they issued to you. There is a code in a box on that form that will tell you how they classified it. Code G (as of this tax season) means that it was a Direct Rollover (from trustee to trustee).

When Fidelity cut you the check, the funds went into whatever account they pay those checks off of, and your account was closed. You need to speak to a tax advisor who understands how to work this issue with the IRA, and you might not do badly to contact an IRA Specialist at E*Trade. I used to deal with these accounts for a living, and trust me, I've seen worse stuff cleared up without the account holder suffering too many slings and arrows, but you need someone who can give you cogent, current advice, but based on my experience, I think that this is fixable. Good luck.
posted by Medieval Maven at 9:12 AM on February 19, 2008

Response by poster: Yes, I talked to e-Trade, they were no help. they suggested I roll over the money, and beyond that, see a tax advisor.
posted by stupidsexyFlanders at 9:23 AM on February 19, 2008

It's too bad there was no one competent to help you at E*Trade. If you have a brick & mortar bank, they might have someone you can speak to face to face who can help you, and it probably won't cost you anything to do it. If I were still in the game I'd feel more comfortable telling you more, but unfortunately I've been away for a while.
posted by Medieval Maven at 10:00 AM on February 19, 2008

If ETrade isn't willing to be helpful to you, why bring them this business?

Were I you, I'd pick up the phone and call Vanguard. I've always found them very helpful in handling transfers and things.

That said, I think that the letter of the law demands that you file an amended return for that year and pay the taxes and penalty on this. According to topic 413 you have 60 days to handle the changeover and that Fidelity should have automatically assessed a 20% withholding.

Here's the real question though: when did you file your 2003 return? The IRS statute of limitations during with they can audit you is 3 years from when you filed. So if you filed early that year, you're done. Get Fidelity to re-cut that check, deposit it somewhere, and go on with your life. The 10 year collection statute doesn't apply here because you filed a return and they accepted it.

If you filed after Feb 19, 2004 however, you're still in the danger window. Theoretically you should file a 1040X and amend your return.

While I do not support theft or fraud, I have to be honest - in your shoes, if I filed on April 15th 2003... I would probably toss the bad check in a drawer and play stupid till May, then get the check re-cut. If the check was cut to you it already had 20% taken out of it, so the difference between what you should have paid in tax on that money and what you did pay was small, if any. If your AGI in that year was under 68,800 you would have owed another 5% on that money (unless you earned over $150k, in which case I suspect you'd be talking to an advisor instead of asking us) plus the penalty.

So while you could file that 1040X and pay the difference it would be a pain in the ass for you and work for the IRS for the sake of ... lessie, if you got a $2600 check that was after a 20% holdback that was a total of $3,250 you took out, meaning a $325 10% early withdrawal penalty plus the 5% to make it a 25% tax (assuming that was your bracket) adding $162.50 for a total liability of $487.50

I personally could rationalize not paying that after this amount of time, given an honest mistake.
posted by phearlez at 12:52 PM on February 19, 2008

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