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IRS: Failing to cash checks doesn’t change tax liabilities

On Behalf of | Aug 28, 2019 | IRS Issues

For many people in Georgia, qualified retirement plans like 401(k)s and IRAs are important not only because they enable retirement savings but also because they support tax benefits over the years. Many receive distributions from their plans, whether loans from a program or payments after retirement, through electronic methods like direct deposit. In these cases, people do not need to worry about depositing the check or potentially losing or forgetting it. However, the IRS has ruled on the tax issues that arise when people receive paper checks and fail to cash them. To the extent that people continue to rely on paper checks, uncashed checks can present a significant tax question, especially when the amounts involved are substantial.

In the IRS ruling, the agency noted that it is continuing to analyze a number of issues involving uncashed checks. The hypothetical the agency presented involved a person who received a fully taxable distribution from a qualified retirement plan. However, this person did not cash the check, make a rollover contribution or in any way deal with the monies disbursed. The IRS said that despite the failure to cash the check, the amount is still part of the person’s taxable gross income for the year. Whatever happens to the check, it remains income for tax purposes.

In addition, the plan administrator is also required to withhold tax from the distribution, regardless of whether the recipient actually cashes the check. In addition, the distribution needs to be reported to the IRS when it was issued, rather than when the check is cashed.

There are a number of complex tax issues that can accompany distributions from retirement plans, especially early distributions or loans. A tax law attorney can provide guidance on correct reporting or dealing with questions or audits by the IRS.