“If a person makes withdrawals from their IRA during calendar year 2008, but the bank they withdrew from make a fairly large (several thousand dollar) withholding error that was not discovered until 2009, is there a way to correct the mistake? “---->Of course; as you can see, this type of bank mishap is not as rare as you might think. A number of financial institutions surprised customers with windfalls of money. I guess needless to say, you MUST call the bank or credit union immediately and report the mishap and need to deal directly with the branch manager and get something in writing verifying the day the correction was made -- signed by a branch manager or etc I guess. You also need to check your account to make sure the correction was actually made. It is the bank's responsibility to document that they mistakenly overwithdrew from make a fairly large withholding error.
“Ideally, can the bank transfer money to or from the IRA to correct the mistake and then report the correction to the IRS?”--->I guess so; it is exclusively what the bank MUST do and the taxpayer, I mean the taxpayer that owns his/her IRA account needs to file amended return for 2008 with the IRS to fix taxation related issue(s) on his/her federal and state return( he needs to attach some written document from the bank or etc. / or notify the IRS on the bank mishap). Revising your tax return is done by filing an amendment. You need to use Form 1040X, along with a new Form 1040, plus any other necessary schedules and forms. Amended tax returns have to be mailed to the IRS on paper for manual processing. The IRS typically processes an amended return about 8 to 12 weeks, but this process can take longer during the IRS's busiest times. Be aware that you have three years to make any corrections that result in additional tax refunds( If you are subject to tax refund). That's because there's a three-year statute of limitations on issuing tax refund checks. This three-year period is measured from the date you filed your original tax return. If you filed your return before April 15th, the three-year period begins from April 15th. If you requested an extension, the three-year period runs from October 15th. If you are beyond the three-year period, you can only receive refunds for overpaid taxes that were actually paid during the previous two years.People who need to report additional income and to correct overstated deductions can file an amended return at any time. Be aware that the IRS has three-years to audit your tax return, and may have a longer period of time if there's substantial under-reporting.