Pension Overpayment

Technical topics regarding tax preparation.
#1
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A client retired in 2015. He just received a letter that his pension was overpaid by $72,000. When he retired, the entire amount was rolled over into an IRA. The company has decided to restore the overpayment to the plan and is not seeking reimbursement from the client. However, the overpayment was not eligible for rollover. Any ideas on how to handle this, since the rollover in 2015 is out of statue?
 

#2
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I'm curious what the potential consequences of your client doing nothing is.

He properly operated on the information he had available at the time. If his former employer is not seeking repayment, then what action is necessary on his part? Will they include the $72K in income to him in 2019 due to its ineligibility for rollover? In that case, he probably ends up with some basis in the IRA account moving forward. That just seems like a logical conclusion, not based on anything authoritative.

I would lean toward inaction unless specifically directed otherwise.
~Captcook
 

#3
Andrew  
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Your client should call the company and ask what forms they'll issue for this transaction, if any, and what years the forms will be for. I would think that he will have $72,000 in the pension plan. And the remainder was rolled over to an IRA. So there may not be a tax consequence but to find out for sure, your client will have to call the company.
 

#4
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Nothing in the pension plan for him. It was all rolled over, including the $72,000 overpayment.
 

#5
Nilodop  
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Any ideas on how to handle this, since the rollover in 2015 is out of statue?. Did you consider section 6501(e)?
 

#6
Andrew  
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Okay, at first you said the overpayment was not eligible for the rollover. Have client call pension company to make sure there won't be any surprises. He's probably not the only one this happened to ...
 

#7
Nilodop  
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So TaxandScubaguy, is the statute still open?
 

#8
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Not for 2015. Return was filed before 4/15/19.
 

#9
Nilodop  
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I assume you mean 4/15/16. Please read section 6501(e) and come back to us on that.
 

#10
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Yes, 4/15/16. Section 6501 is what I looked at first. I think we will contact former employer and see if they will be issuing anything. If not, tax will be paid, if any is due, upon distributions.
 

#11
Nilodop  
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I don't understand the reply.
 

#12
Nilodop  
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Let me try this attempt to explain what I'm getting at. Was the 2015 gross income stated in his return at least $287,999? And by stated in his return, I include omitted income that is
disclosed in the return, or in a statement attached to the return, in a manner adequate to apprise the Secretary of the nature and amount of such item.
. And by gross income, I mean gross income including
(i) In the case of a trade or business, ... the total of the amounts received or accrued from the sale of goods or services (if such amounts are required to be shown on the return) prior to diminution by the cost of such sales or services;


We can go the next step after we get that answer.
 

#13
Nilodop  
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Well, OP has not come back, but I think this could help others some day, so:
The 6-year statute may well apply, depending on the amount of gross income omitted and not disclosed. If it does, then IRS must assert it. Then taxpayer must refute it by showing adequate disclosure. This Heckman case has a good discussion of what is or is not such disclosure. https://casetext.com/case/heckman-v-commr-2. A Form 5500 might be in some cases.
And this Stein case clarifies that such disclosure is subject to a lesser standard than that required by section 6661.
This standard of disclosure compels "greater disclosure than is necessary to avoid the 6-year statute of limitations provided for in section 6501(e)(1)(A)".


So let's go a step further. If the 6-year statute does not apply, does OP's client get to never pay tax on the 2015 omitted income? Probably not. In facts a bit similar to OP, this Eagan case makes that clear with this amusing language. https://law.justia.com/cases/federal/ap ... 13/627633/.
It is no more right to allow a party to blow hot and cold as suits his interest in tax matters than in other relationships whether it be called estoppel, or a duty of consistency, or the fixing of a fact by agreement, the fact fixed for one year ought to remain fixed in all its consequences.
Beltzer, 495 F.2d at 212-13. Or, to paraphrase the hackneyed aphorism, Eagan cannot retain his cake and consume it as well. The decision of the district court is affirmed.

So maybe what OP said above turns out to be right. If not, tax will be paid, if any is due, upon distributions.
 

#14
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The 6-year statute may well apply, depending on the amount of gross income omitted and not disclosed. If it does, then IRS must assert it. Then taxpayer must refute it by showing adequate disclosure. This Heckman case has a good discussion of what is or is not such disclosure.


Too bad OP took off. Whether or not a 1099R was issued, I wonder if the return reflected the entire gross distribution, but also reflected a taxable distribution of $0.

Would that constitute adequate disclosure?

I think it would…
 


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