failure to take RMD

[gman]

Taxpayer recieved letter from broker that althought authorized by taxpayer, the
financial institution failed to make required minimum distributions for past
7 years. Taxpayer assumed they were being move to another account. Not a large sum
of money involved. $700.00 per year.
Financial institiution letter states it will pay for penalties and additional taxes the IRS
is unable to waive.
My question is Should I amend past 3 years and add the RMD to IRA distribution and
should I add the 50% excise tax or attach letter showing mistake and beg
for forgiveness?

Thanks

[DaveO]

Three Years is a long time

I have dealth with this only for 1 year and have never had the IRS insist on the penalty. I vote for taking the catchup distribution on the current year. One of the requirements to have the penalty abated is that the taxpayer took steps to correct as soon as the error was discovered. Amending the returns won't help because the income wasn't received then.

File the 5329's for the affected years and attach an explanation with documentation that the RMD's have been taken and request abatement of penalty.

When Wells Fargo took over a local bank here several retired clients missed getting their RMD's. The bank refused to help in any manner and even said it was the taxpayers responsibility to request it in writing each year. These folks were in their 80's and had been getting automatic distributions for over a decade.

[gman]

Where might I get a little more info on this?
Form 5329 should be sent it for each year ?

[DaveO]

File each year on its own form

You can download the forms on the IRS website or your software may create them for you. The 5329 has signature lines and can be filed by itself. Show the calculation of RMD on an attachment along with evidence that the distributions have been reported in the current year or 2006 if they haven't been report yet. The tax will be paid on the return the past due distributions are reported on.

Example
2003 RMD $700 reported on 2006 1040
2004 RMD $700 reported on 2006 1040
2005 RMD $700 reported on 2006 1040
2006 RMD $700 reported on 2006 1040

Total RMD reported on 2006 1040 $2,800, which should match the 2006 1099-R.

Figure the penalty tax on the 5329 but don't pay it. Instead provide the explanation and request abatement. If the IRS sends a bill present it to the bank.

The instruction for Form 5329 and Pub 575 should help.

[Bjorn]

RMD forgotten

How about just catching it all up this year and seeing if the IRS later sends a bill? It has happened a few times to my customers as well. I simply have the client catch it all up as soon as they notice and pay the income tax on it. The IRS has not sent any nastygrams yet.

[sea-tax]

What all of you have suggested I believe is in correct. As far as I know you are going to file the 5329 and pay the penalty with the return and then request an abatement.
At least this is the way you were directed to proceed per instructions last time I had one of these. It was I admit 4 or 5 years ago but I am not aware they changed the procedure.

In my case it was 20 k or so and after many months of IRS communication it was resolved and the client was refunded the money.

I would think that if you didn't pay the penalty that in the event the IRS finds out they may be less likely to listen to your sob story and grant abatement.

[jainen]

Absolutely right

Absolutely right, sea-tax. I never understand professionals whose approach is, "Let's not follow instructions and see if we get away with it." Not following instructions increases the likelihood that you won't get away with it, because the concept of reasonable cause depends on you making corrections as soon as the cause no longer exists.

In a case where the bank will document its fault (not to mention covering the penalty) there is no reason at all for a professional not to do it properly. That's what they pay you for.

[sea-tax]

Absolutely right, sea-tax. I never understand professionals whose approach is, "Let's not follow instructions and see if we get away with it." Not following instructions increases the likelihood that you won't get away with it, because the concept of reasonable cause depends on you making corrections as soon as the cause no longer exists.

In a case where the bank will document its fault (not to mention covering the penalty) there is no reason at all for a professional not to do it properly. That's what they pay you for.

Thanks jainen , I agree that when we as professionals start picking and choosing what rules to follow we certainly leave the door open for our clients to insist that we take short cuts. And we all know that once they get caught the finger will be pointing straight back at us.