Can You Recover Withheld Tax Not Paid to the IRS?

Question from Lee, Can You Recover Withheld Tax Not Paid to the IRS?

Answer from AI:

When you receive a distribution from a Traditional IRA, such as an inheritance, it is common for the financial institution managing the account to withhold a portion for tax purposes. This is because distributions from Traditional IRAs are generally treated as taxable income. The institution is supposed to pay this withheld amount to the IRS on your behalf. However, if the IRS has no record of receiving the withheld tax, you may be wondering if you can reclaim that money.

Understanding Withholding on IRA Distributions

When you inherit an IRA, the financial institution may withhold taxes on the distribution. This is typically done at a flat rate of 10% for federal taxes, but the rate can vary depending on the total amount and your tax situation. The withheld amount should be paid to the IRS as a prepayment of the income tax you owe on the distribution.

Steps to Address Withheld Tax Not Paid to the IRS

If the IRS has not received the withheld tax, here are some steps you can take:

1. Review Documents: Check the documents you received from the investment bank at the time of the distribution. There should be a Form 1099-R that shows the total distribution and the amount of tax withheld.
2. Contact the Investment Bank: Reach out to the investment bank to inquire about the discrepancy. Request documentation that proves they sent the withheld funds to the IRS.
3. IRS Correspondence: Contact the IRS again to confirm they have not received the payment. Provide them with a copy of the Form 1099-R and any other relevant documentation.
4. Amend Tax Returns: If necessary, you may need to amend your tax returns to reflect the correct amount of tax withheld.
5. Seek Professional Advice: If the issue is not resolved, consider consulting with a tax professional or attorney who specializes in tax disputes. They can provide guidance on how to proceed and may be able to help you recover the funds.

Legal Entitlement to Withheld Funds

If the investment bank did indeed withhold funds for tax purposes but failed to remit them to the IRS, you may have a claim against the bank. The bank has a legal obligation to pay the withheld taxes to the government. If they fail to do so, they may be liable to you for the amount that should have been paid.

Consulting a Legal Professional

Tax matters can be complex, and dealing with the IRS and financial institutions can be challenging. If you are unable to resolve the issue on your own, it is advisable to seek legal advice from a professional. A tax attorney or a certified public accountant (CPA) can help you understand your rights and the best course of action.

Additional Resources

For more information on IRA distributions and tax withholding, you can refer to the IRS Publication 590-B, which covers distributions from Individual Retirement Arrangements (IRAs). Additionally, the IRS Form 1099-R instructions provide details on reporting distributions and withholdings.

Remember, while this information can guide you in understanding the general process, it is not a substitute for personalized legal advice. Tax laws and regulations are subject to change, and individual circumstances can significantly affect your legal rights and options.