Discussion:RMD not taken
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Discussion Forum Index --> Tax Questions --> RMD not taken
| 6 April 2007 | |
| Hi. I want to make sure I understand this correctly. I have had 2 clients this year miss their RMD from their iras. One was the clients fault....the other was the brokers fault. My understanding is this....if the taxpayer was supposed to take a rmd in the amount of $5,000 and did not take this, must pay a 50% penalty on form 5329 but can request a waiver of this penalty. So, the penalty would be $2,500. The $5,000 is not added to his income because he didnt take the distribution....nor does he have to take the distribution. If he takes the distribution in early 2007, this would then reduce his RMD for 2007. Does this sound right?
Thanks! | |
Mtmckeecpa (talk|edits) said: | 6 April 2007 |
| El,
I've had good luck with getting that penalty removed or not even assessed as long as there is reasonable cause for the error and that a process is in place to avoid happening again. If you have access to a tax research company, PPC, BNA etc...they have a good narrative, on steps to take to avoid the penalty and filing the 5329 to protect yourself and the client. PPC states there is no requirment for a TP to receive a "catch up" distribution, the following year's MRD is determined without regard to the prior year mess up. Sorry no cite to give. | |
| 6 April 2007 | |
| I've always told the client to take the distribution as soon as the error was discovered (in your case, 2007) we never pay the penalty upfront, we write a letter explaining why it wasn't taken (I've used various reasons, even as simple as the client didn't know, or forgot) and I explain that they took the distribtion as soon as the error was discovered. I get the them to take the 2 years at once, prior year and current year, attach documentation that they did that, and it has always been abated. I've never had one problem doing it that way. | |
Towntaxlady (talk|edits) said: | 21 March 2008 |
| My clients took their RMD on 1/8/08, thinking they had until 4/15/08 to take it instead of 12/31/07. Do I wait and report the distribution in 2008 and ask for the waiver or include it in their 2007 Income. Problem I see with that is that they are sure to get a 1099-R in 2008 for the 2007 distribution (and the 2008 RMD, as well). | |
| 9 July 2008 | |
| I also just had one of my clients realize that they did not take their RMD for 2007.
I assume that they should just go ahead and take it now along with their RMD for 2008. I then assume the the tax will be reported in 2008 tax return I will follow Kathyt's advice and we will let them ask for forgiveness | |
Michaelstar (talk|edits) said: | 9 July 2008 |
| While this is some time after Mtmckeepcpa's post from April 2007 (I did not see it back then), I want to make a comment on his post that "PPC states there is no requirment for a TP to receive a "catch up" distribution, the following year's MRD is determined without regard to the prior year mess up."
Based on how I understand the rules on MRD's I belive that the "catch up" distribution is one of the requirements needed in order for the IRS to waive the 50% penalty imposed under sec 4974. If we look at Reg 54-4974-2, A-7(a) - see below - it is necessary for "reasonable steps to be taken to remedy the shortfall." I read this as there is a catch up requirement. If I am wrong on this, someone please kindly add to this post so correct information is presented here.
A-7.(a) REASONABLE CAUSE. The tax under section 4974(a) may be waived if the payee described in section 4974(a) establishes to the satisfaction of the Commissioner the following-- (1) The shortfall described in section 4974(a) in the amount
distributed in any taxable year was due to reasonable error; and
(2) Reasonable steps are being taken to remedy the shortfall.
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| 10 July 2008 | |
| If I am reading everything else correct my client should go ahead and take the RMD for 2007 tax year based upon the balance of the account 12/31/06. Now I assume that this will be income for 2008 since that is when the distribution was made and the 1099R will reflect this. They should then make sure they take the RMD for the current year as well.
I should then file a 5329 and an explination of why the RMD was not taken and hope for the ruling of abatement on the penalty. I have also had 2 different preparers tell me 2 different ways to handle it, one said to pay the penalty with up front and with the exlination they will probably refund it, the other said he did not have his client send the penalty and they were expecting a bill but the IRS went along with the expliantion | |
| 10 July 2008 | |
| If I am reading everything else correct my client should go ahead and take the RMD for 2007 tax year based upon the balance of the account 12/31/06. Now I assume that this will be income for 2008 since that is when the distribution was made and the 1099R will reflect this. They should then make sure they take the RMD for the current year as well.
I should then file a 5329 and an explination of why the RMD was not taken and hope for the ruling of abatement on the penalty. I have also had 2 different preparers tell me 2 different ways to handle it, one said to pay the penalty with up front and with the exlination they will probably refund it, the other said he did not have his client send the penalty and they were expecting a bill but the IRS went along with the expliantion | |
Michaelstar (talk|edits) said: | 10 July 2008 |
| Ramfan - I would agree that your client needs to take the 2007 MRD in 2008 to make up for what they missed and take this into 2008 taxable income because as a cash basis t/p, that is when they received it. They should also not miss taking the 2008 MRD timely.
I would not send in the penalty with the form 5329 - no way - no how! I have never done that in the past and always had the penalty abated due to the explanation provided. | |
| 10 July 2008 | |
| I always have my clients take the missed RMD asap and set up automatic RMD's with custodian of the account. In efiling returns with the 5329, the explanation part doesn't go, just a indication checkbox for reasonable cause. The software doesn't even compute the penalty, but I tell the client how much the penalty would be if they don't fix it asap. It's usually not the client's forgetting to take the RMD- but they had the account on auto-pilot and then moved the account elsewhere and forgot to reset the cruise control. | |
Christine888 (talk|edits) said: | 20 August 2008 |
| I also have a client that failed to take 2006 and 2007 RMDs. He is taking them immediately. However, my question is more about the timing of sending in the 5329/waiver letter. Since these distributions will be taxed/reported on the 2008 tax return, do I wait to send in the 5329 with the 2008 tax return? Or, should I send in the request now and maybe have a response by tax filing time?
Also, can someone give me an idea if this is just cause for the penalty waiver? The account that has the RMD issues is a 401k. My client's employer never told the investment company that he had retired. So, RMDs were never made. We took the RMD as soon as we discovered the problem. Also, he is having this account rolled over into an IRA with RMD on autopilot so this doesnt happen again. Do you think this reason will be enough? | |
