I posted about this earlier as a 401(k) loan that was in default and that I had hoped to bring current, only to realize that my brokerage already filed a 1099-R as an early distribution. I only noticed this after I filed my 2025 taxes and they were accepted by the IRS. I know that they will eventually come after me for this owed tax (likely about $17,000 based on my tax bracket ($12,000 + $5,000 as an early withdrawal penalty). I would really like to avoid as much interest as possible and certainly the 20% accuracy-related underpayment penalty. I understand that my best course of action is to file and amended return and pay the tax ASAP rather than wait for a notice in 6-12+ months.
The problem is, while I can file this amended return now, I am not in a position to pay this tax now. I could probably get it paid under a short-term payment plan by October/November, but not sooner. Will filing the amended return now and setting up a payment plan for the tax owed raise any red flags? Should I hold off until I'm in a position to pay the entire balance due (probably September at the earliest)? I'll likely owe about $2,500 in state taxes too, which I assume would be triggered by an amended federal filing.
Neglected to include 1099-R for $50,000 in tax return. Will owe approximately $17,000
byu/Traveler095 intax
Posted by Traveler095
4 Comments
Amended return could take months to process. Get it filed right away. Even if you can’t pay and the return processes and you start to get notices, you can setup a payment plan to stop collection enforcement.
When the brokerage issues the 1099-R to report the outstanding loan as a distribution, you have a grace period to pay it back into your IRA to avoid paying tax on the distribution. I forget the timing off the top of my head, but I remember it being pretty generous. Look into that before amending, though obviously do it quickly.
If you do have to treat the distribution as taxable, then yeah, file the amendment ASAP and start paying what you can, when you can. You won’t be able to sign up for a formal payment plan until the IRS processes the amendment and posts the balance due (and it’s entirely possible that you pay the full amount owed before that happens). If you filed & paid on time for the three previous years, they won’t charge a late payment penalty, but they will charge interest (and they charge interest on the accrued interest). If that doesn’t apply, then they will also charge a late payment penalty of 0.5% of the outstanding base tax per month, and they charge interest on the base tax, the accrued penalty, and the accrued interest.
You’re thinking about it the right way
I wouldn’t wait. Filing the amendment sooner usually helps more than it hurts because it stops the situation from drifting further out of sync
You don’t need to pay it all at once to file. You can amend, then set up a payment plan after. The IRS mainly cares that it’s been corrected and you’re addressing it
Waiting just keeps interest and penalties building in the background
Also on the penalty side, fixing it proactively can sometimes put you in a better position than waiting for them to catch it
Short version: amend now, pay what you can, set up a plan for the rest
I don’t want it to get buried: https://www.irs.gov/retirement-plans/plan-loan-offsets . Assuming you filed timely, get as much as you can into an IRA by 10/15.