Foprgotten IRA Account

[S T]

Client called today, it was discovered that there is a forgotten IRA account.

First question, is whose responsibility is it for caclulating the MDR from this account, the taxpayer, the broker or the tax accountant?

Second question is:

Taxpayer turned 70.5 in September 03 and on this forgotten IRA there has been no ditributions made, nor was it included in the overall calculation of IRA balances for the MDR over the last 4 years. (Taxpayer has another IRA account that the MDR is being calculated and distributions received).

What is the best way to handle now that we are in calendar year 2008.

Sandy

[Black Bart]

Mdr

...forgotten IRA account.

...whose responsibility...?

Certainly not yours. Unless you're an investment counselor getting paid to manage his accounts, it's his responsibility to take care of them. Can't see how he could possibly say "you should have known about my IRA accounts." In fact, why didn't HE know about them?

Second question is:

Taxpayer turned 70.5 in September 03 and on this forgotten IRA there has been no ditributions made, nor was it included in the overall calculation of IRA balances for the MDR over the last 4 years. (Taxpayer has another IRA account that the MDR is being calculated and distributions received).

What is the best way to handle now that we are in calendar year 2008.

Sandy

Guess you know about the MDR date kicking in a year AFTER he turns 70 1/2 rather than ON the date he turns 70 1/2. I think first, before anything, I'd go to the bank and see what they would do or be willing to do on the distributions. Some of them won't redo any old paperwork (don't know if you'd need/want them to), but anyhow it seems to me that the bank as trustee would be the primary responsible party for MDRs.

[Jiggers]

Overlooked IRA

The owner/taxpayer is responsible for the distributions.

The bank or trustee always sends out a letter reminding the taxpayer about the RMD.

Your client is just trying to pass the buck.

[JohnH]

I think I'd tell the client:

"You have a problem here. Work it out with your financial advisor & trustee. When that's finished, get back to me so I can calculate the tax consequences. You will have some penalties due, and once we know the amounts we can determine if it's worth the cost to attempt to get them abated. My hourly rates are $xxx."

[Zee]

I think I'd tell the client:

"You have a problem here. Work it out with your financial advisor & trustee. When that's finished, get back to me so I can calculate the tax consequences. You will have some penalties due, and once we know the amounts we can determine if it's worth the cost to attempt to get them abated. My hourly rates are $xxx."

Best response

[Roberts]

Wow. Sending my client off to have another "professional" handle their tax problems isn't exactly my idea of service.

I would help the client recalculate the RMD with the new information and do what is necessary to handle my clients tax problem. That IS what I'm paid to do is it not? Service seems to be a four letter word around here at times.

And Jiggers was 100% correct. The custodian of the IRA would have sent them a letter on their 70th birthday outlining their responsibilities. Sometimes financial planning and investment management is a heck of a lot more than just picking a fund.

[Zee]

Yes, on the surface it doesn't seem like a good idea and you do make a valid point.

But, a tax preparer isn't responsible to ensure minimum distributions are taken, rather to ensure the client is aware of the need to take minimum distributions each year. The client may have many different accounts. The problem is this type of activity takes time. Many clients think it should be part of the tax preparation with no additional fee.

It's up to the client or the person managing their investments to read letters from the various custodians not the tax preparer's on April 15th. It's already too late.

His financial adviser (if he has one) dropped the ball. How much timeshould a preparer willing to spend to provide this additional service at no additional fee? If we're talking about a few minutes of conversation, no problem. But, if extensive conversations with the financial adviser are required I think the client should be prepared to pay for the service. All of us (including me) give away far too much of our time. Few other professions do the same.

Last, if the client has engaged you for tax planning in addition to tax preparation that's different...

[JohnH]

I'll let the financial advisor and the trustee take responsibility for doing their job, and I'll do mine. I see my job as checking their calculations against the RMD to verify that the calculation is correct, which of course I will do. But I'm not getting in the line of fire, especially since we already know there are going to be penalties and interest.

I'm working a situation of this type right now, and I can assure you that I'm not showing any of my calculations until the people being paid to do the inital work have completed their task. I'll grade their paper, not the other way around. The last thing I want out there is for some lazy financial advisor to use my numbers when I may not have all the information I need, and then point the finger at me when something goes wrong.

I'm going to provide service, but not at the expense of putting my neck on the chopping block. What if Sandy had been providing the RMD numbers for this client without knowing about the "missing" IRA? I'll guarantee you that everyone in the process would be pointing the finger at her. And every time she tried to explain that she was only working with the info she was given they'd be saying "Why didn't you ask for more information?"

[outwest]

Wow..

It's pretty clear your practice is post mortem work not recommending and discussing legitimate strategies for the client to choose.

Must be a lot of these situations this spring because I've got one too. 80 year old whose wife died 3 years ago. Wife handled the finances and IRA is not very large, taxpayer got a letter from broker discussing RMDs that must start now. (at 80?, I suspect the birthday on the broker records is 10 years off)

So, what am I doing with this? Well, we know penalties are out there, so what basis for abatement might there be? Then position the taxpayer to make the best case for abatement.
My suggestion on my client:
1. Based on last years balance (which is all we have) calculate the cumulative RMD that should have happened.
2. Take it out.
(this is to make to case that as soon as the error was discovered, the taxpayer corrected it.)
3. Document a) the birthday on the trustees records, b) the deceased wife's managment of the financial affairs c) age of taxpayer d) plan for compliance going forward.
4. Letter to the client to document that penalties may be assessed, the anticipated basis of abatement request, and that the ultimate decision is discretionary for the IRS which may or may not grant abatement.

Some risk to me? possibly. But the penalty is already there, all I'm trying to help find is a strategy to minimize the damage that is already there.

[Kram BergGold]

My opinion

First, the IRS is pretty good about forgiving the penalty for not taking the proper RMD. As a matter of fact you can now do it wihtout first paying the penalty. Second, as they have not written yo your client about 2003 and 2004 your client should consider removing enough in 2008 to cover the years 2003 to 2008 and see if the IRS ever comes knocking. My guess is they won't. My guess is this IRA is small relative to the others and the additional amounts needed to reach the correct RMD are small and not worth the IRS' trouble..

[Black Bart]

Zee & John are right.

...Sending my client off to have another "professional" handle their tax problems isn't exactly my idea of service.

No, not if you created the tax problem in the first place, but in nine out of ten cases that client isn't looking for "service" -- he's looking for a scapegoat. They see is as somebody's at fault -- either you or himself. Guess which one it's going to be?

I would help the client recalculate the RMD with the new information and do what is necessary to handle my clients tax problem. That IS what I'm paid to do is it not?

Sure, that's generally what all of us would do if he wants to pay you for services that are not included in your original fee.

Service seems to be a four letter word around here at times.

You're not talking about service, you're talking about misplaced nobility. You're a businessman, not a public servant.

[WhiteOleander]

I would prepare the 5329's required. Then attach a statement explaining the error and ask that the penalty be forgiven. I have done this for several clients throughout the years and each and every one has been granted by the IRS.

Sometimes it takes a couple of additional letters. Be sure that the client has taken the necessary distribution to make everything legal at the point the letters are written.

You will look like a hero when you show your client how much money you saved them because of someone else's error.

I do not send in the penalty first and ask for a refund. And it has worked each time.

[Black Bart]

This seems to be

First, the IRS is pretty good about forgiving the penalty for not taking the proper RMD. As a matter of fact you can now do it wihtout first paying the penalty. Second, as they have not written yo your client about 2003 and 2004 your client should consider removing enough in 2008 to cover the years 2003 to 2008 and see if the IRS ever comes knocking. My guess is they won't. My guess is this IRA is small relative to the others and the additional amounts needed to reach the correct RMD are small and not worth the IRS' trouble..

a sensible approach -- many times we get lathered up in anticipation of various penalties like this and if we just keep mum nothing ever matializes. The downside, of course, is that interest runs and IF it ever did surface, then the client would be looking to you for penalty reimbursement. Still, I think KB's right and it likely won't come up.

[Black Bart]

And this is a really good one that I didn't know about.

I would prepare the 5329's required. Then attach a statement explaining the error and ask that the penalty be forgiven. I have done this for several clients throughout the years and each and every one has been granted by the IRS.

Sometimes it takes a couple of additional letters. Be sure that the client has taken the necessary distribution to make everything legal at the point the letters are written.

You will look like a hero when you show your client how much money you saved them because of someone else's error.

I do not send in the penalty first and ask for a refund. And it has worked each time.

I didn't know the odds were so much in our favor and I'll give this a try if and when it comes up. There's some upside here too as it gets settled and you're not on hold for several years waiting for a possible hammer to drop.

[S T]

Distribution

Thank you everyone for your replies.

This client is not looking to place blame on anyone regarding the "forgotten IRA", but rather on how to correct and move forward. It seems the financial advisor, just "presumed" that she was taking the MDR from another account with another institution, so did NOT notify her on this account.

So to correct, the t/p should withdraw the amount for 2004, 2005,2006, 2007 and the current 2008. So all will be taxable on 2008 tax return.

Question, then do I complete the 5329 in 2008 and show the 50% penalty for years 2004-2007 and enter the "wavied" amount and attach a letter of explanation, or file the 5329 separately with an explanation and request for abatement of penalties.

Not sure of the proper procedure.

Thanks,

Sandy