Form 5329, Client refusal

[Gretel]

Client has excess contribution to IRA (no earned income, just royalties received-not a working interest), resulting from not believing me that he had to take it out last year.

Now I am required to file form 5329 but he refuses. Has anyone experience how long it will take for the IRS to catch on and send him a letter?

[jainen]

collect your fee

>>I am required to file form 5329 but he refuses.<<

You are not required to do anything. If he wants to proceed with your engagement, prepare the return correctly and collect your fee.

[OldJack]

When you say "excess" do you mean an amount greater than what he can deduct or do you mean an amount greater than the maximum allowed for anyone ($4,000 or $5,000).

If it is just an amount greater than he can deduct, there is no penalty or form 5329, it is just non-deductible tax basis reported on form 8606.

[Bees Knees]

The excess contribution penalty applies to the excess over earnings. If there are no earnings, there is no IRA contribution allowed. Not even the $4,000 or $5,000 amounts.

[Gretel]

>>I am required to file form 5329 but he refuses.<<

You are not required to do anything. If he wants to proceed with your engagement, prepare the return correctly and collect your fee.

I my eyes you say two opposite things in one breath. To prepare the return correctly I have to file form 5329 if I know about the situation, have I not? I would be more than happy to learn that I am wrong.

[jainen]

prepare the return correctly

>>To prepare the return correctly I have to file form 5329<<

To prepare the return correctly you must include Form 5329. Whether the client chooses to sign and file it is not your problem.

[OldJack]

The excess contribution penalty applies to the excess over earnings. If there are no earnings, there is no IRA contribution allowed. Not even the $4,000 or $5,000 amounts.

Then how would you have non-deductible IRA contributions to report on form 8606, line 2?

EDIT: Don't bother answering the dumb question. I guess I had a brain fart! I knew excess was if no earnings.. just wasn't thinking today. My bad.

[Black Bart]

It usually

Has anyone experience how long it will take for the IRS to catch on and send him a letter?

takes about a year and a half for them to match things up on paper returns. If mailed now, he'd probably get a letter on it sometime around August of 2008. Unfortunately for him, penalty and interest begins running now.

Anyway, I'm with the others -- if he would not agree to do it right, I would not do the return.

[Snaggletooth]

Lesson in Manners

Gabriele, this guy needs a lesson in manners.

First of all, there IS no IRA deduction as others have observed. I think you intended to state that this guy has a required minimum distribution that he is failing to report.

Do you have paperwork from the IRA custodian that leads you to this conclusion? Is there a 1099-R? Has he been told he should have a RMD and has refused, thus leading to 5329 situation?

If you have paperwork from the custodian, I would defray the customer by telling him that his problem is with the custodian, not with you. The custodian has told you this is a penalty situation, and has already told the IRS this is a penalty situation.

I can't believe he would refuse the 5329 knowing IRS will be coming after him with a deficiency letter. Lots of these fist-pounders back off in a hurry if they know they are throwing up a red flag.

I would stick by my assertions and file the 5329. Tell him if he doesn't want to file it, he will need to go somewhere else. I don't know about a small town in Montana, but here in my corner of the world he could probably find someone who would do this for him. Occasionally, I lose customers to the "guy across town."

Best regards, Ron Jordan

[Gretel]

Thanks to you all. I know exactly what I need to do: Prepare the return including the penalty and send my client away if he refuses.

It's actually a sad story. Here it goes just for clarification for anyone who is interested:

This guy never had enough money to even think about putting any money into a retirement fund, now he is over 65 and finally got some money out of his royalties. Since, already as a child, he had worked for what he is getting now, he was under the impression this would be earned income to him.

So in a way he fulfilled his dream for once in his life being able to put money into an IRA. It just very hard to let go of your dream, and I know all about that.

I spend an hour with him last year trying to avoid all this, but in his eyes I am the one who tries to take away his dream, that he has a right to have.