Most Americans don't receive a 1099-R unless they are older or have a financial emergency. A 1099-R is only issued for a withdrawal from a retirement plan, such as a 401k or an IRA. In most cases, the amount listed on a 1099-R reflects taxable income, so you must report a 1099-R when you file your taxes. Failure to do so can result in IRS penalties ranging from an adjustment letter (and a tax bill) to criminal prosecution.
One of the primary functions of the IRS is to detect unreported income. The way that income is reported in America helps the IRS achieve this objective. Anytime someone pays you income, whether you are an employee, an independent contractor, or an investor, you receive a form, such as a W2 or 1099, showing the amount of that income.
To help with compliance, the IRS also receives its own copy of those tax forms. When you file your income tax return, the information is checked against the numbers the IRS has on file. If you fail to report a 1099-R, the IRS will know since it already has its own copy. If you file a tax return without a 1099-R you received, your information will not match the records the IRS has. In the case of a form such as a W2 or a 1099-R, this will usually result in the IRS sending you a letter requesting the omitted form.
IRS Adjustment Letter
In some cases, the IRS may send you an adjustment letter in addition to the request for your 1099-R. An adjustment letter is formally called a CP11 notice. This is a message from the IRS indicating that the agency recalculated your taxes. The IRS bases this recalculation on the information it has received about your income.
If you failed to report your 1099-R, you probably also miscalculated your taxes. The CP11 notice will show you what your correct tax is, according to the IRS, and will usually come with a bill. You can either pay the adjusted amount or file an appeal within 60 days.
Causes for Audit
In more serious cases, a missing 1099-R could result in an IRS audit. While the agency is more likely to send you a deficiency notice and adjust your taxes for simple errors if a missing 1099-R is part of an overall sloppy or incomplete tax return, you may be giving the IRS causes to order a full audit of your income taxes.
Fraud charges are rare in tax cases, but they do occur. If your missing 1099-R is part of an obvious attempt to underreport income to the IRS, you may face civil or criminal fraud charges. If your missing 1099-R was not a result of poor record-keeping on your part, but rather a concerted effort to evade taxes, you could face a civil fraud penalty of 75 percent of your underpayment, or even up to five years in prison for a criminal tax fraud conviction.
Tax Filing Tips
- Review personal information carefully to ensure that it is correct. This is one of the most common errors taxpayers make. Personal information also includes the routing number for the taxpayer's bank account and listing their Social Security Number accurately. Go over these details before filing the income tax return to confirm they are correct.
- Understand that an extension from the IRS does not mean more time to pay. It means the taxpayer has been given more time to file their income tax return. Any income tax owing is still due by April 15.
- Be sure to use the correct tax filing status on the income tax return. Often, people will use the head of household status, which is meant for single people who are supporting dependents when they are single taxpayers or a married couple who should be filing their taxes jointly. Filing under the head of household status requires a dependent; it also adds up to a higher standard deduction than for taxpayers in other situations. Using the wrong filing status can lead to owing more taxes, as well as penalties.