In another thread (on the Vanguard RMD service), I mentioned this, and that she had not received a refund of the penalty or any communications from the IRS about it. Alan S informed me that the instructions for Form 5329 explain how to deduct the penalty, so you don't actually pay it up front as the HRBlock software says to do. Of course Alan is right, and this is easily verified by reading the instructions.
We agreed that filing a 1040X was the way to go to get this corrected. I just started working on this, and came across the HRBlock improper handling of it. There is no way to do it, using the HRB interview, as Alan and the 5239 instructions say to do.
Here are the IRS instructions:
There is no way to enter "RC" and the amount you want waived on the dotted line next to line 54 using the software, and of course the amount on line 54 is calculated by the software based on the amounts on lines 52 and 53 (52 = RMD, 53 = amount distributed, 54 = Line 52 minus line 53).1. Complete lines 52 and 53 as
2. Enter “RC” and the amount you
want waived in parentheses on the
dotted line next to line 54. Subtract this
amount from the total shortfall you
figured without regard to the waiver, and
enter the result on line 54.
3. Complete line 55 as instructed.
You must pay any tax due that is
reported on line 55.
The IRS will review the information
you provide and decide whether to grant
your request for a waiver.
However, what you can do is open the form and override the amount on line 54, so I overrode it and entered 0. You can't e-file when you override an entry, but since you can't e-file 1040X anyway, we will print it out, and write in the entry on the dotted line next to line 54 of Form 5329 per instruction step 2 above by hand.
After doing the override above, completing the 1040X was easy, and the refund of the penalty amount is indicated.
My normal policy is to study IRS instructions and other publications for any tax topic I'm not already familiar with, but I was lazy and didn't do this for Form 5329. Another lesson not to trust tax software without doing your homework.