Report Employer 401k Direct Rollover | Solo 401k Plan | Form 1040

SCENARIO: It appears that I did not properly report the direct rollover of my former employer 401k to solo 401k on my personal tax return form 1040. Reason being, the IRS letter notice says I may owe additional income taxes if I agree with their findings, which obviously I don’t.  The IRS letter basically states that I received a form 1099-R from previous 401k provider showing that funds were disbursed and reported by the releasing institution on form 1099-R using code “G” which is the code used to communicate to the IRS the direct rollover/movement of funds from one retirement plan to another. The same IRS letter communication has a section where I can indicate whether or not I agree with the IRS findings.

ANSWER: You may have not properly reported the movement of funds to your solo 401k on your form 1040 lines 15a,b. These lines are where you are supposed to report the direct rollover from one qualified such as a 401k plan or pension plan to another qualified plan such as a solo 401k plan. A direct rollover is reportable but not taxable.   

Note that the reporting is the same if you had processed a direct rollover from an IRA to your solo 401k plan. The only difference is that you would report the IRA direct rollover on lines 16a,b of your Form 1040.

Processing the Correction:

This is a simple correction requiring the submission to the IRS by fax of the following three (3) documents.   

Document 1. As detailed in the IRS letter notice, you need to complete page 8 of the IRS notice and check off "I don't agree with some or all of the changes", sign your name and date.
  
Document 2. Submit copy of the Form 1099-R issued by your former employer’s 401k provider showing the direct rollover and reporting code “G” in box 7.  

Document 3. Submit a letter signed by you detailing the following, or similar language. Your current solo 401k provider or tax professional should be able to help you with the brief explanation language. 

Re: Notice CP2000; Tax Year 2011; Pension Transfer Correction

To Whom It May Concern:

This is in response to your recent letter regarding the 401k transfer from my former employer in the amount of $XX,XX.XX to my solo 401k plan. Because the funds were directly rolled over from one 401k plan to another, the movement of the funds is not taxable.  

To further confirm the direct rollover from my former employer 401k to my Solo 401k plan, I have enclosed a copy of the 1099-R form issued by my former employer’s plan administrator plan showing the total direct rollover with a letter code of “G”.