Retirement Plans—Default on Retirement Plans Loans Were Premature Distributions

Posted by Kim Chen on November 7th, 2016

The taxpayer took $33,000 in loans from her retirement plan, but defaulted on the loans. The plan sponsor issued the taxpayer a Form 1099-R reporting the unpaid loan balance as a taxable distribution, which she failed to report on her income tax return. The IRS issued a notice of deficiency of approximately $8,300 for failing to report the income and imposed the 10% Section 72 penalty tax for premature distributions before age 59 1/2. The taxpayer argued that the distributions couldn’t be taxable because she continued to receive payment notices even after the loans were determined to be in default. The Tax Court agreed with the IRS’s deficiency notice, as well as an accuracy-related penalty of $1,664 because she made no effort to determine how the amounts should have been reported. Dora M. Martinez , TC Memo 2016-182 (Tax Ct.).

Copyright © 2016 Thomson Reuters/PPC. All rights reserved.