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 any 1099-R when you file your taxes. Failure to do so can result in anything from a simple notification from the IRS to criminal penalties.
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 a 1099, showing the amount of that income. To help with compliance, the IRS also receives its own copy of those tax forms. 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, formally called a CP11 notice, 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.
In more serious cases, failing to file a 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 inaccurate return, you may be opening the door to a full examination of your return.
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.