Help an elderly widow with an RMD mess

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Help an elderly widow with an RMD mess

Postby House Blend » Wed Feb 23, 2011 3:04 pm

Mom is 77, a widow, and has Alzheimer's disease.

Brother has durable POA for her financial and medical affairs. I thought we were mostly on top of her financial situation, but a recent foul-up with RMDs has opened a can of worms.

She has IRA and 403b accounts scattered in many places, and last year we moved a few to a Vanguard IRA. We thought that the RMD situation was under control--distribution checks from these accounts would arrive by mail in December automatically. But then we realized that one of the larger accounts, moved to Vanguard in January 2010, did not withhold any RMD for 2010 or send us any notice that an RMD of about $8800 would be needed.

Then it got worse: we found an IRA at an insurance company with a balance of ~$57K, that has never had any distribution taken out. Mom's first year of RMDs was 2003. My brother has found old letters from account managers asking for her instructions on how to handle her RMDs, and it appears that Mom never responded to any of them. Most of the other firms apparently set up automatic RMDs despite the lack of instructions, but in this one case, it seems that they simply gave up. In those years, circa 2003, Mom had a CPA doing her taxes. I think my brother started doing them in 2009.

The question is what to do next. We know about Form 5329, which is used to report underpayment of RMDs among other things. There even seems to be a "beg for mercy" option where you can try to argue that you shouldn't have to pay the 50% penalty--seems to me that with Mom's illness and records in disarray, we should have a good case.

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?

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.

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?
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Postby chaz » Wed Feb 23, 2011 3:13 pm

Probably file a Form 5329 for each of the years.
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Postby Sidney » Wed Feb 23, 2011 3:44 pm

My understanding is that the RMD is a calculation across all IRAs and does not have to be taken uniformly from each account. That may be why nobody has flagged this. The custodian has no idea whether you are taking it all from one account or pro-rata. I doubt the IRS has the resources to aggregate this and check it. They are having enough problems processing returns.
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Postby crow » Wed Feb 23, 2011 4:50 pm

I would make an appointment with the IRS and take all the paperwork you have in to them. I'm sure, under the circumstances, that some kind of resolution could be reached. If ever a case qualified for the "beg for mercy" clause, it sounds as though your mom's should. If things sound too bad from the IRS, I'd get a tax lawyer to try to negotiate with them if the amount in question is worth paying the lawyer fees.

Good luck.
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Postby Watty » Wed Feb 23, 2011 5:11 pm

Before you do anything I would check with a tax accountant on how to best approach the IRS.

If you wait to talk to an accountant until after you have already tried to work things out with the IRS you may have already limited your options or done something wrong.

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A valuable message

Postby Taylor Larimore » Wed Feb 23, 2011 5:24 pm

Hi House Blend:

It appears to me that you are ensnared in a complicated tax situation. I would seek the help of a qualified accountant rather than trying to untangle this mess, myself.

You have given us a valuable message: Strive for simplicity.

Thank you.
"Simplicity is the master key to financial success." -- Jack Bogle
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Re: Help an elderly widow with an RMD mess

Postby billern » Wed Feb 23, 2011 5:32 pm

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?
Look at form 5329. You can fill it out and file it as a standalone return. There is no reason to amend prior tax returns.

Regarding prior year RMDs, remember that it is possible to satisfy the RMD requirements without taking money out of each account. Your mom could have been taking her total RMD out of just one or two accounts and left the others sitting there. The RMD is not required to be taken out of each account.

Talk to a CPA who understandings the RMD rules. Have him or her look at the prior year returns and make sure to also provide FMV of accounts for each year. Then work with the CPA to determine how to mitigate your problems.
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Re: Help an elderly widow with an RMD mess

Postby BruceM » Wed Feb 23, 2011 5:33 pm

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"

:-)

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Postby House Blend » Wed Feb 23, 2011 6:08 pm

Thanks everyone for the helpful comments.

BTW: we are aware that you can use an IRA from Company A to satisfy the RMD for an IRA at Company B. That didn't happen here. :-(

I agree with Taylor regarding simplicity. Also, apropos the thread on "What is your worst investing mistake?", I can share with you my mother's worst investing mistake: having a best friend whose husband is an insurance salesman.
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Postby flowerbuyer » Wed Feb 23, 2011 7:35 pm

My mom, who had been recently diagnosed with Alzheimer's, forgot to mail her income tax return which had been prepared by her accountant, but did mail her quarterly paymentss in one lump sum, but not the payment of her taxes owing. When she gave me the letter from the IRS about failure to pay her taxes, I called her accountant. He had me mail the return, snd advised me to ask for a waiver of the penalty..

So, I mailed a letter to the IRS, explaining the circumstances and my mother's disease, and requested that the penalty be waived.

The IRS waived the penalty. So they can be reasonable, after all.
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Postby MarkNYC » Wed Feb 23, 2011 8:45 pm

House Blend,

Sorry about your mother's situation. That can be rough enough without tax problems.

There are several ways to try to rectify the situation. A few things to consider: first, thus far I don't think IRS has been able to identify RMD's that were not taken, or at best very rarely. That could change any time, but it's unlikely the earlier year amounts will now be discovered. Second, absent fraund, there is a 3-year statute of limitatiions on additional assessments, so the 2003-2006 years may be immune.

Here's what I might do: the $8,800 untaken for 2010 should be distributed ASAP, taxable in 2011. For the insurance account IRA, I'd try to obtain year-end balances for 2002 forward, which would be needed to determine RMD amounts. Assuming the account value did not fluctuate much from 2002, the annual RMD's would be roughly $2,200. I'd immediatly withdraw $13,200 (or correct amount if known) representing untaken RMD's for 2003-2008, also taxble in 2011. The 50% penalty can be waived if it can be shown that (a) the shortfall in any year was due to reasonable error and (2) upon discovery of the error, immeditate steps were taken to remedy the shortfall. In your situation, I think the chances of penalty abatement are good.

Although the regulations don't require it, the IRS wants you to pay the penalty first via Form 5329 and then request an abatement and refund. Having rectified the untaken distributions ASAP, I'd be inclined to not offer-up the penalty and hope the penalty issue never comes up. If it does, I'd explain the relevant circumstances and document the remedial steps taken that should be sufficient for waiver of the penalty.

You should probably discuss the various options with a tax accountant in order to determine how you want to proceed.
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Postby House Blend » Wed Feb 23, 2011 9:28 pm

MarkNYC wrote:Although the regulations don't require it, the IRS wants you to pay the penalty first via Form 5329 and then request an abatement and refund. Having rectified the untaken distributions ASAP, I'd be inclined to not offer-up the penalty and hope the penalty issue never comes up. If it does, I'd explain the relevant circumstances and document the remedial steps taken that should be sufficient for waiver of the penalty.


Thanks MarkNYC,

Reading the instructions for Form 5329 (and also mentioned by BruceM), it looks like you don't have to pay the penalty up front:

Waiver of tax. The IRS can waive part or all of this tax if you can show that any shortfall in the amount of distributions was due to reasonable error and you are taking reasonable steps to remedy the shortfall. If you believe you qualify for this relief, attach a statement of explanation and file Form 5329 as follows.
1. Complete lines 50 and 51 as instructed.
2. Enter "RC" and the amount you want waived in parentheses on the dotted line next to line 52. Subtract this amount from the total shortfall you figured without regard to the waiver, and enter the result on line 52.
3. Complete line 53 as instructed. You must pay any tax due that is reported on line 53.
The IRS will review the information you provide and decide whether to grant your request for a waiver.


Edit: maybe I misread you. Are you suggesting, for the Insurance Co. IRA, that we take the "correct" distribution now and not file 5329s for it unless the IRS raises the issue? (The other IRA, with the $8800 shortfall, we can fix now.)
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Postby MarkNYC » Thu Feb 24, 2011 4:28 pm

House Blend,

All of the untaken RMD's are subject to the penalty if not barred by the 3-year statute. Some people would file Form 5329 and pay the penalty for all amounts, and then submit a written request for penalty abatement and penalty refund. After taking corrective action, I would be inclined to not volunteer the penalty on Form 5329 for any years, since the IRS may never assess a penalty.
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Re: Help an elderly widow with an RMD mess

Postby House Blend » Tue May 21, 2013 9:39 pm

Note: this post got trashed as a consequence of the recent BH outage and data loss. I've resurrected it by pulling it out of the Google cache.

freckles01 wrote: I am going thru a similar situation with my dad's RMD mess and would like to know if you have an update to share? Did the IRS ever contact or formally waive penalties


We took distributions from the IRAs that she had missed, filed a 5329 with her 2010 tax return, and attached a statement of explanation (per the instructions for Form 5329). We didn't pay the penalty up front, and asked that it be waived.

So far, the IRS has been silent; another year or so of silence and I assume that will mean the penalty has been waived.

One thing I would have to ask my brother is how he figured out how much to take out of the $57K IRA that had several years of missed RMDs. I think he either managed to locate enough of the Form 5498s or annual account statements to figure it out, or else he called the custodian of the IRA and asked for help.

Good luck.
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Re:

Postby frugaltype » Wed May 22, 2013 6:43 am

flowerbuyer wrote:My mom, who had been recently diagnosed with Alzheimer's, forgot to mail her income tax return which had been prepared by her accountant, but did mail her quarterly paymentss in one lump sum, but not the payment of her taxes owing. When she gave me the letter from the IRS about failure to pay her taxes, I called her accountant. He had me mail the return, snd advised me to ask for a waiver of the penalty..

So, I mailed a letter to the IRS, explaining the circumstances and my mother's disease, and requested that the penalty be waived.

The IRS waived the penalty. So they can be reasonable, after all.


I became a replacement trustee for one who was literally incompetent. He had filed no tax returns for several years. The IRS and state collected the interest but waived the penalties.

In my experience, writing the IRS a letter if much better than dealing with their phone people. The latter rarely know what they're doing, but letters seem to get to knowledgeable people. Letters take awhile to process, however, so expect to wait weeks for an answer.
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