The Weekly Scenario: Required Minimum Distribution
Question: I have a client who failed to take a required minimum distribution from his IRA. Is there any way around the stiff penalty imposed by the IRS?
Answer: One of the most common tax mistakes is forgetting to take the required minimum distribution (RMD). The penalty for missing an RMD is 50% of the missed amount. Fortunately, there are things that can be done.
In fact, the IRS does grant relief for this mistake and it takes just one filing with the IRS (and no user fee is assessed!). Moreover, no penalty is due unless the IRS rejects the waiver request.
In this situation, the first thing to do is to have your client withdraw the missed RMD (the IRS doesn’t even consider giving any relief from penalty until this is done). The income from the RMD will be included on the tax return in the year of distribution which needs to be filed with IRS form 5329. On the form, you should write “Reasonable Cause” and list the amount you want to be waived. The IRS requests certain info on an attached statement explaining how the mistake occurred, what you did to remedy the mistake and what steps are being taken to be sure it doesn’t happen again.
Most importantly, we advise clients not to pay the penalty. Instead, wait for the IRS to reply as to whether the request has been approved. If it is denied, the IRS will send notice requesting the payment.
Comment: This is one area where the IRS does grant relief and no question it is certainly worth a try, particularly because the penalty can be so high.
As always, if you have any questions or would like to learn more, please contact Steve Shane at firstname.lastname@example.org .
ABOUT STEVE SHANE
Steve Shane provides strategic counseling to clients in need of estate administration, charitable giving and business continuity planning while minimizing estate, gift, and generation-skipping transfer tax exposure. He offers legal guidance to clients on asset protection and the proper disposition of assets in accordance with the client’s objectives, while employing tax planning techniques such as the use of irrevocable trusts, life insurance planning, lifetime gifts and charitable trust. He is also experienced with drafting documents for business planning, the incorporation and application for exemption for Private Foundations and the administration of decedents’ estates.
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