Inherited pension

[D'Artagnan]

Client inherited a pension. 10% was withheld at distribution. Relative told client that "inheritances are not taxable."

3 years later, IRS sends letter to client requesting Mucho Payment with hefty "failure to pay" and "failure to file" penalties. I know regs on this just changed but believe they are not retroactive to 2003. Has anyone had luck requesting removal of such penalties on the grounds that client was misinformed?

[DaveO]

Was the "Relative" a tax professional?

If they are maybe they would handle the case. I would probably request that the penalty be reduced but I would hold out very little hope that the IRS will do so. I can't believe the misinformation that usually follows when a client starts out with, "I know this is true ...."

[Bees Knees]

Tell your client to ask the relative to pay the interest and penalties.

[Unregistered]

Pay both the penalty and interest (or enter into agreement)

and then file request to abate penalties, based upon gross misunderstanding of tax laws and the difference between estate inheritances and inherited pensions.

IRS will only listen to abatement request after all is paid or entered into agreement to be paid.

JoshInNC

[OldJack]

IRS will only listen to abatement request after all is paid or entered into agreement to be paid.

Well Josh... I have always sent a letter disagreeing and requesting waiver and I have always found the IRS willing to abate without payment if you give a reasonable cause. Once you pay I think it would be harder to get the IRS to agree. Of course all that I have had in the last decade were small cases of a few thousand tax. Be prepared with my approach to wait a few months for an answer and abatement.

Just another case of everyone is a tax expert, however, a relative is probably not a very good "reasonable cause". I would probably go for simply the taxpayer was unaware or whatever is best to get the result. I do think the request has a better chance if submitted by a tax pro on letterhead with power of attorney attached.

[veritas]

If there is cause that will make IRS feel sorry for you use it. There is always a cause. This money was inherited so that means someone died. That's a pretty good cause. Remember you are dealing with government workers who are generally bleeding heart liberals. If the first letter doesn't work send in another one just in case the first one was received by a mean spirited conservative.

[jainen]

I'm not buying

I'm not buying this story. If he believed it was non-taxable, why didn't he at least file a return to get back his withholding? Why didn't he do something about the 1099?

Maybe the relative was another heir who was jealous about losing the pension, and so set him up to get in trouble. Well, it worked.