Rmd

[lenboush]

I have an 86 year old taxpayer who just infomred me that she has an IRA that she has never taken any distributions from. The letter form the insurance company has the RMD instuctions printed right on her annual report and she admits they have been there every year. She just ignored them (probably didn't even read them or understand them if she did)and did not bring them with her when she had her taxes prepared. We started preparing her return when she was 80.

This is a sweet (but clueless) old lady that I hate to see get hit with 16 years worth of RMD penalties. Can anyone suggest what approach I might take to help her minimize the impact of this issue? Her income is very low and is barely required to file. The IRA is only a little over $6000.

Thanks in advance for ideas!

[Brad Imsdahl]

Calculate the amount that should have been withdrawn each year. Then have the total withdrawn immediately. Then file Form 5329 with the penalty, but do not pay the penalty. Instead, attach a letter explaining the situation and that the little old lady honestly did not understand her obligation to withdraw the RMD. Also explain the steps being taken now to resolve the issue, and ask that the penalty be waived.

If IRS won’t except the excuse, they will send her a bill for the penalty.

[Kram BergGold]

Disagree slightly

First, has she taken distributions from other IRA's. If so were these enough to cover the minimum from the one that was not tapped.
If this does not apply and a penalty is owed, here is how the IRS told me to handle the situation. File the forms and pay all penalties due. Then ask that the penalty be abated by explaining the circumstances. I have done it this way twice and both times the IRS returned all penalties for missing an RMD. Be sure to tell IRS that she has very little money and such a penalty would be a great hardship. As well as her being old and not understanding the law.

[jainen]

bamboozle them

>>pay all penalties due<<

How do you calculate that? The excess accumulation tax is 50% per year. After 16 years that could really add up! Although the statute of limitations has expired on the penalty itself not assessed before 3 years ago, the excess accumulation is still in the account so even the current penalty is based on what should have happened in each of those 16 years.

I've misplaced my trusty slide rule but it seems to me the calculation would be mighty complex. Most of the fund should have been distributed by now, and the RMD for the last so many years is being charged mainly against the amounts subject to the 50% penalty. For 2006, the penalty alone probably exceeds the total that was in the account to begin with!

I don't remember that the law provides for a "reasonable cause" defense against this particular penalty, although a couple of other excuses are acceptable under Sec. 4974. Would you plead for mercy on the grounds that it's unfair for penalties to exceed the total amount of the retirement fund? If you could find that rusty slide rule, would you lay out some of that twisted math and try to bamboozle them?

[Brad Imsdahl]

File the forms and pay all penalties due. Then ask that the penalty be abated by explaining the circumstances.

The requirement to pay the penalty first and then ask for an abatement was done away with in 2005, per the Form 5329 instructions.

[veritas]

Calculate the amount that should have been withdrawn each year. Then have the total withdrawn immediately. Then file Form 5329 with the penalty, but do not pay the penalty. Instead, attach a letter explaining the situation and that the little old lady honestly did not understand her obligation to withdraw the RMD. Also explain the steps being taken now to resolve the issue, and ask that the penalty be waived.

If IRS won’t except the excuse, they will send her a bill for the penalty.

If they send a bill then ask for the abatement again.

[fliszt]

Just

a thought. Write your letter and fill out the form. Then I "think" I would telephone the IRS and get someone to talk to. Write down their ID# and then explain the situation to them. Get some affirmation from the agent and ask if you can fax the letter/form to that particular agent. If you don't make any headway with the first call, then call back again and get someone else. That way you may get off on the right foot instead of writing and mailing to whomever.

[taxdude71]

I think I would request a letter ruling from the IRS before I did anything. More likley they will just make her start taking her RMD's going forward.

[Jiggers]

Rmd

Whatever you do, don't send in the penalty. I did one for a client and it took forever to get the amount refunded, with interest. Lots of lost non-billable time for an elderly client.

I would calculate the penalty and fill out the 5329. And then attach a beautifuly composed letter that the IRS WILL NOT READ.

Then duplicate the letter and send it in with the penalty notice.

I would also get a 2848 on the taxpayer and have the IRS send you copies of the notices because the elderly person won't know what to do. Though, the IRS expects all taxpayers to be competent, even into their 100's! But, they don't expect the same of their employees!

And you will probably do a little charity work for this client because you will rack up a bunch of non-billable hours.