House Blend wrote:But Form 5329 is for reporting underpayment of 2010 RMDs. So, I suppose she needs to file an amended return for each of the tax years 2003-2008? (We can skip 2009 because of the RMD moratorium.) But even so, how is one supposed to determine the correct amount? Example: if she had taken an RMD in 2003, what would her 2004 RMD have been?
Yes, per the IRS instructions for form 5329, you'll have to go back and file an ammended return for each of the years insufficient RMDs were taken. To do this, for each year, you'll have to find out the value of each IRA as of 12/31 of the previous year to determine her RMD for that year. You then combine all IRAs and treat as one big IRA (note: this includes any SEP or SIMPLE IRAs she might have). Subtract the actual amount withdrawn for that year and the difference will be the underwithdrawn amount.
The IRS does have a process for requesting a waiver to the underwithdrawal penalty, described at the bottom of p.6 of the 5329 instructions under "Waiver of Tax"http://www.irs.gov/pub/irs-pdf/i5329.pdf
For each employer sponsored plan, like the 403(b), RMDs have to be taken from them separately. I've not been involved with chronic employer plan underwithdrawals before, but I'd imagine you'd handle them the same way, but separate from the TIRA(s).
House Blend wrote:Something about this still smells funny to me, because the insurance company has to report these account balances every year to the IRS, so the IRS could presumably see that she hadn't taken the correct RMD for many years running. Doesn't seem like it could go on this long without the IRS taking notice.
This assumes the IRS and insurer are responsive to the apparent needs of taxayers/account holders...they typically aren't.
House Blend wrote:My inclination is to contact the IRS before proceeding further. We certainly want to fix the problem, but want to maximize her chances of not having to pay penalties.
Any advice? Any guesses on how the IRS will handle this?
You could certainly call the IRS 1-800 help line for guidance, but I'm pretty sure they'll tell you to do what I've outlined above. And in your 5329 attached letter, based on my experience corresponding with the IRS, keep it short and to the point, while clearly pointing out your mother's medical condition and your intent of promptly fixing the problem. And then, as the IRS themselves likes to say, "Don't let it happen again"