Taxpayer tries to avoid income by not cashing check from retirement plan


Here’s a situation you don’t often come across. The IRS recently issued guidance on the tax treatment of a failure to cash a distribution check from a qualified retirement plan.

Under the scenario in the revenue ruling, an employer with a qualified retirement plan is required to make a distribution from the qualified plan to an individual in 2019 who is a plan participant. The qualified plan does not include a qualified Roth contribution program, nor does the individual have an after tax investment in the qualified retirement plan. The employer makes the required distribution by withholding tax as required by IRC section 3405(d)(2) and mailing a check for the remainder to the individual. Although the individual receives the check and could cash it in 2019, she does not do so. She also does not make a rollover contribution with respect to any portion of the designated distribution, and no other exception to income inclusion under IRC section 402(a) applies. No explanation is provided for her failure to cash the check by the revenue ruling.

Under the revenue ruling, the individual’s failure to cash the distribution check received in 2019 does not permit her to exclude the amount of the distribution from gross income in 2019. It also does not alter the employer’s obligation to withhold tax as required under IRC section 3405(d)(2). And it does not alter the employer’s obligation to report the distribution to the individual and the IRS on a Form 1099-R.

For purposes of this revenue ruling, it is irrelevant whether the individual keeps the check, sends it back, destroys it, or cashes it in a subsequent year.