50% penalty for excess accumulations

[origun]

75-year-old taxpayer didn't take his RMD in 2010. It had been done automatically in previous years by the insurance company with the IRA but, according to client, there were personnel changes during 2010 and it wasn't done. After realizing the problem, RMDs for both 2010 and 2011 were done earlier this month (same am't distributed for each year). My assumption is that both distributions will show on a 1099-R for 2011.

So...my question is: when do I deal with a 5329 and request for a waiver of penalty? Do I wait until doing the 2011 return and attach with a mailed-in return or do I request a waiver now?

And...I have read 2 different things about paying penalty. One source said penalty must be paid with waiver request and another said that it didn't have to be pre-paid.

Thanks for any thoughts you might have.

[DonPriebe]

75-year-old taxpayer didn't take his RMD in 2010. ... When do I deal with a 5329 and request for a waiver of penalty? Do I wait until doing the 2011 return and attach with a mailed-in return or do I request a waiver now?

And...I have read 2 different things about paying penalty. One source said penalty must be paid with waiver request and another said that it didn't have to be pre-paid.

Do the 5329 on the 2010 return. That's the year that the RMD wasn't taken. I don't think that this will preclude e-filing, assuming that your software handles that portion of the 5329.

Pay first and ask for a refund used to be the protocol, but that was changed several years ago. I filed a 5329 for this exact scenario in 2008 without a payment and haven't heard a word since.

[origun]

Thanks, Don--and a follow-up

I appreciate your response. After e-filing with the 5329, did you mail in a written explanation, requesting a waiver or did you just e-file the 5329?

And I guess I need to try to locate a 5498 for 2010 showing what his RMD was for 2010, based on 12/31/09 account balance. What he actually took out was based on 12/31/10 balance, I think, as it was exactly the same amount for 2010 as 2011.

[Bill Tubbs]

F5329 line 52

Had this happen with a client 2 years ago. On Form 5329 entered the amount (let's say $1000) of the oops on line 50, zero on line 51, and zero on line 52 with "RC (1,000)" on the dotted line. I linked an explanation in my software to line 52, and then e-filed. So, the 50% tax was NOT paid at the time of the e-filing, and the client hasn't heard anything since.

[Snaggletooth]

Paying the Penalty

Origun, I've got a similar situation (See my thread "Sudden RMD Penalty Relief").

I expect the penalty to be roughly $15,000. I am filing the 5329 with a letter requesting abatement and am recommending to client that he NOT pay the penalty with the 5329.

Mr. Don Priebe is correct, paying the penalty concurrent with the abatement request is absolutely the proper protocol.

However, I still believe IRS wishes to work with the big banks and insurance companies because they have egg on their face at missing so many RMDs for 2010. IRS doesn't have to do this, but I believe the political climate would work against them if they enforced these 50% penalties. Customers would be enraged at their banks and insurance companies.

Remember the old commercial "It's not nice to fool mother nature?" Well at the highest environs of our country it's also "not nice to mess with big banks and financial institutions."

[DonPriebe]

Mr. Don Priebe is correct, paying the penalty concurrent with the abatement request is absolutely the proper protocol.

I think I said that that was the PREVIOUS protocol, but the current practice is not to pre-pay the penalty.

[dmj4]

Just the penalty for 2010?

The amount taken out in 2011 to try and correct the 2010 non RMD, will go on 2011 return. Correct?

[origun]

follow-up

I was the one starting this thread. After reading input from many of youm here's what I did (hope it's correct!): I filed a 5329 with the 2010 return, requesting waiver of penalty, and electronically attached an explanation. Taxpayer took out his 2010 RMD in March 2011 as soon as he realized the problem (as well as his 2011 RMD) and was told by the fiduciary handling the IRA that both distributions would be included on a 2011 1099-R so I claimed no IRA income in 2010. We'll see if he hears anything from IRS!

Thanks to several of you for your input.