What Does a 1099-R With Code P Mean for Your Tax Return?

A 1099-R form reports distributions from pensions, annuities, and retirement plans. If your form includes Code P in Box 7, it indicates a prior-year reporting error that could affect your tax return. Understanding this code helps prevent filing mistakes and unnecessary tax liabilities.

Reasons for Code P

Code P signifies that a retirement distribution reported in a prior year was later deemed ineligible or made in error. This often occurs when an excess contribution is withdrawn after the tax year in which it was originally reported. Retirement plans have strict contribution limits, and any excess must be corrected to avoid penalties. If the correction happens after the original tax year has closed, the payer issues a new 1099-R with Code P to reflect the adjustment.

A common scenario involves excess deferrals to a 401(k) or similar plan. For 2023, the elective deferral limit was $22,500 ($30,000 for those 50 and older). If an employee exceeded this limit across multiple employers and didn’t correct it by April 15, 2024, the excess would have been taxed in 2023. If the plan later distributed the excess in 2024, a 1099-R with Code P would be issued, but the amount wouldn’t be taxable again.

Another case involves IRA contributions exceeding the annual limit of $6,500 ($7,500 for those 50 and older) in 2023. If the excess wasn’t withdrawn by the tax return deadline, it incurred a 6% excise tax each year it remained in the account. If later removed, the 1099-R reflects this correction, but Code P ensures it isn’t taxed again.

Effect on Previous Filings

A 1099-R with Code P indicates that a distribution previously reported to the IRS should not have been taxed. If the original return included it as taxable income, the taxpayer may have overpaid and could be eligible for a refund—provided the statute of limitations has not expired.

The IRS allows amendments within three years of the original filing deadline or two years from when the tax was paid, whichever is later. If the adjustment falls outside this period, recovering overpaid tax may not be possible. A change in Adjusted Gross Income (AGI) can also impact tax credits, such as the Earned Income Tax Credit (EITC) or the American Opportunity Credit, both of which are income-sensitive. Additionally, Medicare premiums, known as IRMAA surcharges, are based on prior-year tax returns, so an AGI correction might reduce these costs.

Amending a Return

To correct a tax return, taxpayers must submit Form 1040-X, revising previously reported figures. Since a 1099-R with Code P adjusts a prior-year distribution, the amendment must ensure taxable income, deductions, and related tax calculations reflect the correction. The IRS processes amended returns manually, which can take up to 20 weeks.

Supporting documentation, such as the corrected 1099-R and account statements, should be included. Clearly explaining why the original return overstated income and how the correction affects tax liability helps avoid IRS inquiries or delays. If the adjustment affects multiple areas of the return, each change should be itemized to prevent discrepancies.

State tax filings may also need amendments. Many states use federal AGI as the basis for calculating taxable income, meaning an IRS adjustment could affect state tax liability. Some states automatically adjust returns based on federal changes, while others require separate amendments. Checking state-specific guidelines ensures compliance and avoids penalties or interest.

Reporting Steps for New Filings

When receiving a 1099-R with Code P, taxpayers must ensure the distribution is excluded from the current year’s taxable income. Since this code signifies a prior-year adjustment, the amount on the form should not be reported as taxable. Tax software or preparers must be instructed to disregard it to avoid double taxation. The IRS cross-references reported income with issued tax forms, so mishandling this could trigger an automated notice.

Taxpayers should also check for a separate 1099-R with Code 8, which indicates taxable earnings that must be reported in the year of withdrawal. Unlike Code P, which corrects the original excess amount, Code 8 represents taxable income for the current return. Overlooking this distinction could lead to underreporting income and potential penalties.