RMD not taken in year of death, bank back-dates and said it was. Is this legal?

[mammondee]

New client this year. Her husband passed away in March, 2013. They did not take the year of death RMD from his IRA, and transferred the entire balance to her existing IRA (a non-taxable surviving spousal rollover). When client was at my desk I told her about the requirement. She went to the bank, they transferred his RMD to her unqualified money market account on 03/26/2014....So far so good.

However, when she came back to my office, she brought me a "2013" 1099R the bank made out for her. They said in their records, they dated the distribution 12/30/2013. The 1099R was in his name and social security number and box 1 filled out for the RMD, box 2 was blank, and "taxable amount not determined" was checked. The distribution code was 7.

I called and quizzed the bank, stating the 1099R should be for 2014. They said they make these kinds of corrections all the time. I researched, called them back and quizzed them again. They simply blew me off indicating they were the "experts" in this field and "this is the way it is done".

This all seems very wrong to me, (on so many levels) but perhaps there is a code section, or some kind of substantial authority that would allow the bank to do this. Please weigh in with your opinions.

[JohnH]

I don't know if they can, but I've seen something similar before so it may be they have some leeway in correcting certain types of mistakes. Your best bet is probably to work with the paperwork you are given and let the bank deal with the fallout if there's ever a question. You're not responsible for what the bank does - only for how you report it on the tax return.

What would be your alternative, other than to refuse to prepare the return if you don't feel comfortable about it?

[mammondee]

I want to do this return. There is much more going on.....such as no RMD for both husband and wife since 2008! (Over $50,000)...I like the client and want to help her get it right. We will be filing the past 1040X with the 5329 attached to beg for penalty relief (over $35,000) for the back years. I don't want the current year to be mis filed in any way. I want it clean as a whistle.

I know this distribution was not taken until 2014.....and believe it should be included in 2014 income (along with the other $50,000) including the 5329. If the bank files the 2013 1099R, I will have to report the distribution , and then show zero taxable in 2013 to accommodate the IRS matching. This still will probably not comply because of the distribution code 7 (IRS looking for it it be taxable).

I really don't want to do this and would much rather find out their is some provision for the the bank to tell the IRS a RMD in year of death was taken in 2013 when it was really taken in 2014. Then I could file the 2013 return, including the 1099R death distribution in good faith. That would certainly be the easiest thing to do.....but I am after the "correct" thing to do.

[buzzardbreath]

A number of issues

There is a huge question in my mind about whether a taxpayer is required to take an RMD in the year of his death. For example, it may very well be that the payer disburses all RMD payments in the month of April, and your client's spouse died prior to April.

The bank's response to you is typical. Large institutions can do no wrong, after all they are the ones with all the lawyers, experts, CPAs, etc. They are also the ones who use as much underpaid and untrained temporary clerical help as they can get away with, and make as many mistakes as the ignorant and uninformed.

Consider the effect of responding on the assumption the bank is correct. If this distribution is large (you say $50,000), then the failure to take the RMD results in a huge penalty. Asking the bank to reimburse the client for such a large amount will be guaranteed to get their attention, when a casual phone conversation simply gets you laughed at. If the amount is large, then the remaining amount in the IRA is huge as well. Your client can insist on a corrected 1099-R, or else threaten to rollover her IRA to another bank down the street. If the RMD was $50,000 with joint survivorship terms, it is quite easy to imagine the remaining amount could exceed a half-million dollars.

You've got to understand the way these people think. With bankers it is simply money. (actually with most people it can easily be money) Costing them money, or costing them a large depositor gets their attention. You've simply got to get beyond this BS of "service to the customer" "citizen of the community" "time to smile and talk about the weather" and all the public relations they throw at you.

Finally, you can wait for the horrible letter from the IRS, assuming you give them enough credit to discover the RMD is not reported. Then you can respond with the truth, if need be showing them the deposit that was made in 2014, and then place the burden on them to rectify the bad reporting from the bank. If they are left with the choice between confronting the bank and shutting up, they will shut up.

[joanmcq]

Taxable amount not determined is always on a 1099-R for an IRA. Why? THE BANK HAS NO IDEA WHETHER THE CONTRIBUTIONS WERE DEDUCTED. If the taxpayer has basis in the IRA, the taxable amount is figured on form 8606. If no basis, ITS ALL TAXABLE! So nothing in box 2 does not equal zero.

The 5329s can be filed on their own, you don't need to do a 1040x. The catch up distributions are reported in the year taken, so for your client, catching up will be quite a lot taken out.

As far as the bank backdating a distribution? Never heard of ANYTHING that would allow this.

Sorry for the caps, but on my iPad I can't underline for emphasis.

[mammondee]

There is a huge question in my mind about whether a taxpayer is required to take an RMD in the year of his death. For example, it may very well be that the payer disburses all RMD payments in the month of April, and your client's spouse died prior to April.

The bank's response to you is typical. Large institutions can do no wrong, after all they are the ones with all the lawyers, experts, CPAs, etc. They are also the ones who use as much underpaid and untrained temporary clerical help as they can get away with, and make as many mistakes as the ignorant and uninformed.

Consider the effect of responding on the assumption the bank is correct. If this distribution is large (you say $50,000), then the failure to take the RMD results in a huge penalty. Asking the bank to reimburse the client for such a large amount will be guaranteed to get their attention, when a casual phone conversation simply gets you laughed at. If the amount is large, then the remaining amount in the IRA is huge as well. Your client can insist on a corrected 1099-R, or else threaten to rollover her IRA to another bank down the street. If the RMD was $50,000 with joint survivorship terms, it is quite easy to imagine the remaining amount could exceed a half-million dollars.

You've got to understand the way these people think. With bankers it is simply money. (actually with most people it can easily be money) Costing them money, or costing them a large depositor gets their attention. You've simply got to get beyond this BS of "service to the customer" "citizen of the community" "time to smile and talk about the weather" and all the public relations they throw at you.

Finally, you can wait for the horrible letter from the IRS, assuming you give them enough credit to discover the RMD is not reported. Then you can respond with the truth, if need be showing them the deposit that was made in 2014, and then place the burden on them to rectify the bad reporting from the bank. If they are left with the choice between confronting the bank and shutting up, they will shut up.

The deceased taxpayer had not taken a RMD since 2008....including his year of death.

This one distribution is only about $9,000. The $50,000 is the total of all missed RMD for both the husband and wife since 2008. The remaining balance in the surviving spouse's IRA is just average or less.

I'm afraid me, as the preparer, would be the fall guy. I am a CPA and I know the distribution was taken in 2014. I am simply looking for some kind of substantiation to support what the bank did. I would love to report it that way!!! However, when I file the back year's 1040Xs with the accompanying 5329....asking for a total of $35K in penalties be abated....I think this will be looked at VERY closely by more than just the IRS employee that happens to open the mail that day!

[joanmcq]

I'm a CPA too. Why are you saying you have to file 1040x's? The only change would be the penalty for RMD not taken, and that can be done with just the 5329.

Does your client have statements showing the distribution in 2014? I know if it is a BANK error, such as the client told the bank to send the RMD, and the bank made the distribution from a regular savings account, the bank can correct the error. But this sounds like client error, simply didn't tell the bank to make the RMD.

I would a) keep the statements for 2013 & 2014. You'll need them. Report the 1099-r but back it out with an explanation 1099 issued for wrong year. Report in 2014. Keep statements for the inevitable CP2000 notice, along with any correspondence the client has had with the bank. Correspond in writing.

[mammondee]

[QUOTE=joanmcq;162662]Taxable amount not determined is always on a 1099-R for an IRA. Why? THE BANK HAS NO IDEA WHETHER THE CONTRIBUTIONS WERE DEDUCTED. If the taxpayer has basis in the IRA, the taxable amount is figured on form 8606. If no basis, ITS ALL TAXABLE! So nothing in box 2 does not equal zero.

The 5329s can be filed on their own, you don't need to do a 1040x. The catch up distributions are reported in the year taken, so for your client, catching up will be quite a lot taken out.

As far as the bank backdating a distribution? Never heard of ANYTHING that would allow this."

Thanks so much for your reply. It only makes since we could file the 5329s alone (without the 1040x's)....but in reading the instructions to the letter....it was unclear.

[mammondee]

In reply to Joanmcq: Thank you for your input!

The instructions to the 5329 are a little unclear to me. The exact wording in the instructions to the 5329 is below, and a little wiry to me!

"Prior tax years. If you are filing Form
5329 for a prior year, you must use the
prior year's version of the form. If you do
not have any other changes and have
not previously filed a federal income tax
return for the prior year, file the prior
year's version of Form 5329 by itself
(discussed earlier). If you have other
changes, file Form 5329 for the prior
year with Form 1040X, Amended U.S.
Individual Income Tax Return."

In this case, the taxpayer has no other changes...but HAVE filed the previous returns....the instructions say file the 5329 by itself if you "have not previously filed a federal income tax return..."

It only makes since to file the 5329 by itself, and I am glad you told me that is what you would do.

As far as the catch up contributions, yes, the taxpayer will be pulling somewhere around $50 - $60 of back distributions all in 2014! She will have what I call a "tax situation". However, because I know that now, we will do a quick 2014 estimate, and set her up with proper withholdings.

The client does have all her statements. (very good record keeper). The client never did request any kind of distributions from the bank....she did not know she should. However, you comment as to if the bank makes the error, they could make this kind of correction really might help in this instance! You see, The client was advised to transfer the balance of his IRA into her IRA in November of 2013. The bank took a RMD from HER IRA at that time! Never did take the RMD from HIS IRA!! The hourly paid teller who did the transfer said "that was my fault".......Now mind you the taxpayer never did ask for the husband's RMD to be taken, but it really seemed peculiar to me the bank would think to take her RMD and not his!!!! This really may be the answer!! Maybe, IF the bank has the leeway to make this kind of correction, I should report the distribution just as the bank has reported to IRS.

[DonB]

My understanding from recent reading is the RMD of a deceased spouse is taken from the surviving spouse's inherited IRA based on the deceased souse's age. the surviving spouse's own RMD would also be taken.

[Burke]

The client never did request any kind of distributions from the bank....she did not know she should. However, you comment as to if the bank makes the error, they could make this kind of correction really might help in this instance! You see, The client was advised to transfer the balance of his IRA into her IRA in November of 2013. The bank took a RMD from HER IRA at that time! Never did take the RMD from HIS IRA!! The hourly paid teller who did the transfer said "that was my fault".......Now mind you the taxpayer never did ask for the husband's RMD to be taken, but it really seemed peculiar to me the bank would think to take her RMD and not his!!!!

The bank or other IRA custodian does not have the responsibility to automatically generate the RMD's. But I was under the impression, because this situation has happened so often, that the IRS now requires the custodian to send a letter to the IRA owner telling them what the RMD is before the end of the year, and that they should make a request for a withdrawal. Did they do this? The bank took her RMD because it was handled as another transaction by a human being who directed it be done since it came to light in the course of the rollover.

[mammondee]

But I was under the impression, because this situation has happened so often, that the IRS now requires the custodian to send a letter to the IRA owner telling them what the RMD is before the end of the year, and that they should make a request for a withdrawal. Did they do this? The bank took her RMD because it was handled as another transaction by a human being who directed it be done since it came to light in the course of the rollover.

The bank sent out annual statements as their 5498. The look very "computer-like" with just box numbers and amounts. An example to follow but remember, there are several "computer" lines before and after what I am reproducing.

BX8 SEP EMPLOYER .00
BX9 SIMPLE .00
ROTH 13 FOR12 .00
BX10 ROTH 13 FOR 12 .00
BX12ARMD DATE (2014) 12/31/2014
BX12BRMD AMOUNT (2014) 15,468.70
BX13APOSTPONED CONT .00
BX14AREPAYMENTS .00

BX7___X___ _____SEP _____SIMPLE _____ROTH
BX11 RMD REQUIRED FOR 2014 X
2013 FORM 5498 - IRA CONTRIBUTION INFORMATION OMB NO. 1545-0747
THE INFORMATION IN BOXES 1-5,7-11,12A/B,13A-C,14A/B IS BEING
FURNISHED TO THE INTERNAL REVENUE SERVICE

I could go on, but you get the point. I am unsure what (or if) there was a letter attached....The client only brought this. She is 84, and this is complete jibberish to her.

[Burke]

Ah, yes. I suppose that method would satisfy the condition to notify the TP of the upcoming RMD amt. And very convenient for the custodian, who does not have to send an additional document later in the year. This is received in the spring of the year just past, killing two birds with one stone by giving the FMV as of 12/31/13 and the RMD for 2014. Just like the corporations that send out the 1099-DIV attached to the last dividend payment, even though that may be in October. Think of all the postage saved. And that is if the TP has not elected to receive them electronically.

[Bees Knees]

To be clear, if the taxpayer dies before the beginning date for RMDs, no distribution is required for the year of death. TTB page 13-24.

If the decedent was already receiving RMD at the time of death, then the beneficiary can leave the IRA in the name of the decedent and take out the distributions over the longer of:
• The beneficiary's own life, or
• The decedent's life.

Exception: If the beneficiary is a surviving spouse, the surviving spouse can threat the IRA as his or her own by rolling it over to his or her own IRA. RMD thus depends on the surviving spouse's age.

The beneficiary also has the option of waiting 5 years before taking the entire IRA balance as a distribution, if the decedent dies before the beginning date for RMDs.

In any event, the decedent is not required to take RMD for the year of death when the decedent dies before the last day of the year. That is because it is the beneficiary that may or may not be required to take the RMD for the year of death, depending on one of the above options. Under no circumstance can a distribution after the date of death be treated as income to the decedent. All distributions after the date of death are taxable to the IRA beneficiary.

[Burke]

Thank you Bees Knees for a clear and concise description. I am printing it for my files.