Missed RMD - now what?

[FEDUKE404]

A client "forgot" to take their RMD from a traditional IRA for calendar year 2010.

On January 15th of this year, they did make such a (late) withdrawal. (No funds were withdrawn during calendar year 2010.)

How (and when!) does the issue of the 50% penalty get handled? And how does the IRS obtain the information that such an omission has occurred? NOTE: There were other IRA accounts, and distributions were taken from them to cover (exceed?) the RMDs.

Would I need to find out the RMD for each separate account (there are at least five), then total all distributions, and calculate the penalty on the overall "shortfall"?

It is my understanding the 2011 Form 1099-R will just show a "regular" withdrawal, or is that a bad assumption? Will they just have a new (recalculated) RMD amount for 2011, and go forward?

I figured someone here has prior experience with such an event. Looks as if it will become a very painful "Oops!!" to say the least.

Thanks!

FE

[Grace]

RE: RMD not taken

First, I would calculate the RMD for each separate account, total it and determine the overall shortfall, if applicable. Maybe you'll get lucky and find out that the TOTAL RMD was satisfied by distributions from other IRAs in excess of their RMD

If there is a shortfall, the 50% penalty gets calculated on Form 5329 and gets added to their tax liability on their 2010 return (Line 58).

See the instructions for Form 5329, page 6 for requesting a "waiver" of this tax.

"How does IRS obtain info on RMDs? IRS does document match that involves the Form 5498 which lists Year End FMV of IRAs, etc. along with 1099R's which list the distributions. The Form 5498 may even have a box for institution to check if the owner took RMD.

If they took their 2010 RMD in 2011, the institution may goof up on their 2011 RMD so the taxpayer should pay close attention to that.

Grace

[Gene V]

Agree with Grace
TTB 13-25
Other RMD Rules

More than one IRA. If a participant has more than one IRA, determine
a separate RMD for each IRA based on designated beneficiaries
of each IRA. However, the total RMD for all IRAs can be
taken from any one or more of the IRAs.

[Nashville]

Let's ALL play by the rules

Rules for RMDs. The onus is placed on the custodian to make a mandatory distribution of RMD to the holder. It is not supposed to fall upon the taxpayer to ask the custodian for the RMD every year.

Previous posts have centered around how the taxpayer and preparer can scratch around and calculate a penalty to ding the taxpayer for this horrendous oversight. If they have the calculative machinery in place, the IRS will come after this poor sucker with an electric chair if need be.

The culprit in this drama, however, begins with the custodian. I wonder if IRS will come after multinational giants Prudential, Transamerica, or AIG with a penalty for them as well. Somehow I think not. Accuse me of the "evil rich" philosophy if you wish, but if the taxpayer is on the hook for this, so should these huge companies with their administrative bumbling and fumbling.

[FEDUKE404]

Plan B approach?

The scenario as expressed by Grace is fairly consistent with what I expected. In a nutshell, calculate each separate RMD in an appropriate manner, total the amounts withdrawn from all such accounts, and then deal with the actual shortfall via Form 5329.

I have seen various methods of client notification over the years. One in particular received a certified mail, return receipt requested, letter from the institution advising them (once again) of the need for a RMD. My guess is the trustees are now less aggressive - "oh, by the way...." in small print at the end of a monthly statement.

Has anyone gone the route of requesting a waiver as the IRS allows? Supposedly the IRS has been known to show a kinder/gentler side for such, even without the client meeting some of the "automatic" reasons a waiver can be granted. There even appears some room for "I forgot" to "I'm old!" depending on which way the winds are blowing. One would think the client showed at least a good faith effort by resolving the matter the first two weeks in January.

Here is a link of interest: http://www.ehow.com/how_2165537_irs-...ributions.html Excerpts: "A well-written letter with a clear and valid explanation has a good chance of being accepted" and "You do not need to pay the penalty when you file the form. If the IRS accepts your reason, you won't have to pay the penalty at all. If they don't, they will bill you for the penalty amount."

Most of us on these boards know the general rules or at least can read what is present in The TaxBook. What I was really looking for was a board member who has personally encountered, and dealt with, a situation such as the one presented.

FE

[geekgirldany]

I don't want to take over Fed's post, but I have a client that did not take a 2010 RMD at all... and still has not took out any money. Should I tell them to take out the RMD and ask the bank to apply it to 2010? Or are they stuck with the penalty?

And I have already filed their tax return for 2010. I should have known this but for some reason I was thinking there was waiver on the RMD for 2010. I made a bad mistake.

[S T]

Waiver for Penalty

I did have one about 2-3 years ago - I requested the waiver based on the "reliance of the broker or institution to notify the Taxpayer of the RMD" and that broker/institution was negligent for 4 years - so had a "mess"

IRS did accept the request for waiver - as their had not be a prior request on file.

I do as a cross check calculate the RMD's for my clients to match into the RMD's that the Clients receive from their 'Institutions" sometimes being multiple accounts. And then the client and I arrive at an agreement of what needs to be dispersed, say from "one account vs multiple accounts" My services are only a cross check!

Hope this helps,

Sandy

[FEDUKE404]

Is the preparer also at risk?

I don't want to take over Fed's post, but I have a client that did not take a 2010 RMD at all... and still has not took out any money. Should I tell them to take out the RMD and ask the bank to apply it to 2010? Or are they stuck with the penalty?

And I have already filed their tax return for 2010. I should have known this but for some reason I was thinking there was waiver on the RMD for 2010. I made a bad mistake.

I've reconciled myself to the fact that my client will be subject to the 50% penalty. There is nothing that can be done at this stage to alter those circumstances, exclusive of preparing the Form 5329 and throwing himself at the mercy of the IRS with a well-written IRS waiver request.

But you have also raised another separate question. Are you at exposure for not determining the penalty yourself for the client you referenced?? (Yes, the client may not like it - but that is their problem.) With the IRS looking over our own shoulders with ever-increasing fervor, it seems as if we all might need to "check" those numbers for anyone facing a RMD scenario.

I'm sure there are those on the board who can cite all kinds of letter rulings/court findings etc to clarify further this aspect of the problem.

FE

[DaveO]

When one of the local banks here was bought out by Wells Fargo they stopped taking the RMD's for all persons who did not request they issue one. I jumped through the hoops to figure the penalty and request abatement for several and had a couple pointed remarks for the bank's handling of the event. All penalties were abated. After a couple of years it came to light that several persons who should have been receiving RMD's had not since their income was below filing requirements and they didn't notice. They started taking the distributions again but we never heard from the IRS. Perhaps the story would have been different if taxable income was involved. I'm in agreement that the custodian's need t be held to task on this not the taxpayer.

[geekgirldany]

I don't have that many older clients. So I might just make a list and give them a call before the end of the year. For my client thankfully the balance on the IRAs are around $4,000 each. So the penalty won't be huge. They have went through this before with an IRA they did not know about. Got that waived. Will have to see how this goes.

I do believe it is the bank's place to let them know.