Clarifying CARES Act 401k withdrawal questions from 2020

Wait, so if the tax return shows they only taxed 1/3 of it that first year, does that mean the other 2/3 gets taxed automatically in 2021 and 2022? Or was I supposed to manually report something? I didn't withdraw anything else from my 401k after that initial $40k.

Yes, if your 2020 return reported only 1/3 of the distribution as taxable, then the IRS system automatically includes the other 1/3 portions in your 2021 and 2022 tax years. You don't need additional 1099-Rs for those years. When you prepare your taxes for 2021 and 2022, you need to manually report the additional 1/3 portions ($13,333 each year) as income on your tax return. The tax software should have a specific input area for "CARES Act distribution from previous year" or something similar. If it doesn't prompt you, you may need to enter it as "Other Income" with a description.

Does this actually work for complicated situations? I had a CARES Act withdrawal but also did a rollover in the same year and my tax person completely messed it up. Would this service be able to figure that out?

I'm suspicious of any service that claims to interpret tax documents. How do they handle security concerns? I wouldn't want to upload sensitive financial information to some random website.

For complicated situations like rollover plus CARES Act withdrawal, it worked really well for me. The system recognized both transactions separately and explained how each should be handled. It even flagged that my tax preparer had missed reporting a portion of the CARES distribution in year two. Regarding security, they use bank-level encryption and don't store your documents after analysis. They explained their whole security process before I uploaded anything, which made me comfortable. I was hesitant too at first but it saved me from making a costly mistake on my taxes.

How exactly does this work? Isn't it just the same as calling the IRS directly? Why would I need a service for that?

Yeah right. There's no way anyone is getting through to the IRS in 15 minutes. I've spent HOURS on hold only to be disconnected. This sounds like a scam where they just take your money and you still end up waiting forever.

It works by constantly redialing the IRS using their system until they get through, then they call you and connect you directly to the IRS agent. It saves you from having to sit on hold for hours. The service is definitely different from calling directly. The IRS phone system is notorious for long wait times or just disconnecting you entirely. Claimyr's system automatically navigates the phone tree and waits on hold for you, then calls you when an actual agent is on the line.

Can you still make that election now? Or was that something that had to be done on the 2020 return?

Unfortunately, the election to report the full amount in the first year had to be made on your original 2020 tax return. Since you already reported only 1/3 of the distribution as taxable in 2020, you're now locked into the three-year reporting method. The only way to change this would be to file an amended 2020 return (Form 1040-X), but that has risks and costs that likely outweigh any potential benefits at this point. You'd pay interest and possibly penalties on any additional tax from reporting the full amount in 2020, plus you'd draw additional scrutiny to your return.

You can repay a CARES Act distribution within 3 years of the date you received it to avoid taxes on the repaid amount. So if you took it out in July 2020, you have until July 2023 to put it back. You'll need to file amended returns to get back any taxes you already paid on the portions reported in 2020 and 2021.