Tax issue: Made a mistake on Inherited IRA RMDs for five years

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Small Law Survivor
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Tax issue: Made a mistake on Inherited IRA RMDs for five years

Post by Small Law Survivor » Wed Oct 11, 2017 8:32 am

My wife inherited a small IRA in 2011 - approximately $15,000.

Being the know-it-all that I am, I helped her figure out the RMDs from 2011 through last year. However, I calculated the RMDs from the single life expectancy table. I did not (as I should have) used the "factor minus one" method.

I was discussing this IRA with an accountant earlier this year, and he mentioned that you can't use the factors in the table for an inherited IRA - you must use the starting factor and deduct one every year thereafter. In my wife's case (she was 59 when she inherited the IRA), this would be:

26.1
25.1
24.1
.... and so on

I mistakenly used the factors as shown in the table:

26.1
25.2
24.4
... and so on

(table is on p. 94 of IRS pub. 590)

I've recalculated what the RMDs should have been each year, using the "minus 1" method, and the underwithdrawal is quite small - a total of about $100.

I'd appreciate any advice on how to deal with this. Right now, my plan is to just withdraw an extra $100 this year, and hope that this is such small potatoes that the IRS will never bother with it. The cost of going back and filing amended returns for five years to address an underpayment of about $20/year doesn't seem worth it.

My question: am I assessing this problem correctly? Am I missing anything?

Thanks in advance.

gotlucky
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Re: Tax issue: Made a mistake on Inherited IRA RMDs for five years

Post by gotlucky » Wed Oct 11, 2017 8:57 am

I think the best thing to do is withdraw the amount you should have withdrawn, like you suggested, and then just wait and see. It's very unlikely anything will happen.

Keep documentation (a memo to yourself in your tax file) as to why this year's distributions is larger so you won't forget if questioned about it a few years from now.

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House Blend
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Re: Tax issue: Made a mistake on Inherited IRA RMDs for five years

Post by House Blend » Wed Oct 11, 2017 9:33 am

I would go ahead and file Forms 5329 for the years in question. You can do this stand-alone, without a 1040-X. I think only 3-4 lines on that form are relevant, so it is unlikely to take much time.

There's an option to beg for mercy and not be penalized. If you go that route, I think you should take an additional distribution now that matches the shortage. (And mention this in your attached statement.)

Since the stakes are small (50% of $100) I think another viable option is to not do a make-up distribution, don't beg for mercy, and simply pay the penalty.

kaneohe
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Re: Tax issue: Made a mistake on Inherited IRA RMDs for five years

Post by kaneohe » Wed Oct 11, 2017 12:25 pm

Here are instructions about pleading for mercy from F5329 instructions:
Using the wrong table sounds like reasonable error and taking additional distributions
now (to be taxed this yr) to compensate for the shortfall seems like a reasonable compensatory action so
it seems likely that your waiver would be granted (personal opinion). Filing stand alone 5329 as House Blend
suggests seems like the easiest path..........although the instructions suggest stand alone use is for when you don't
have to file the 1040, it seems worth a try since nothing is changing on the 1040. The statement of explanation seems
to be key here so spend some time on that.

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 52 and 53 as
instructed.
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.

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Watty
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Re: Tax issue: Made a mistake on Inherited IRA RMDs for five years

Post by Watty » Wed Oct 11, 2017 12:39 pm

kaneohe wrote:
Wed Oct 11, 2017 12:25 pm
Here are instructions about pleading for mercy from F5329 instructions:
There a number of threads with similar situations. If you search the boards for "5329" you will find a number of threads like this one.

viewtopic.php?t=176155

Pay particular attend to any responses by "Alan S" since he is very knowledgeable about tax matters.

Spirit Rider
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Re: Tax issue: Made a mistake on Inherited IRA RMDs for five years

Post by Spirit Rider » Wed Oct 11, 2017 12:41 pm

You should definitely go the Form 5529 route. There is no Statute of limitations (SOL) on Form 5329.

You will calculate the total of all the missed RMD amounts and withdraw them immediately. Then complete and submit a Form 5329 for each year and request a waiver of the 50% penalty for reasonable cause. The reasonable cause will be "wrong calculation method". With this fact pattern, It is virtually certain the IRS will grant the waiver.

It is not a beg for mercy. That implies that it is only sometimes granted. I have never heard of a 5329 submission requesting a waiver of the penalty for reasonable cause, not being granted.

jebmke
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Re: Tax issue: Made a mistake on Inherited IRA RMDs for five years

Post by jebmke » Wed Oct 11, 2017 2:26 pm

I have begged for mercy for a mistake on my wife's inherited RMD as well as for several TaxAide clients. They have all been accepted. As long as you make it clear that you have fixed the problem they probably will waive the penalty.
When you discover that you are riding a dead horse, the best strategy is to dismount.

Small Law Survivor
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Re: Tax issue: Made a mistake on Inherited IRA RMDs for five years

Post by Small Law Survivor » Wed Oct 11, 2017 3:31 pm

Thanks for suggestions above - however, keep in mind that this was a $15,000 inherited IRA. I have created a spreadsheet showing the actual RMDs and the "correct" RMDs, and the total difference over the five year period is about $100.

I guess I'm wondering whether this is so de minimis that it's not worth going to the trouble of preparing F5329s for each of these years. I mean, what is the risk the IRS will ever bother with this? Don't they have bigger fish to fry? And, if the IRS does focus on this, what's are the consequences? A 50% penalty on $100 under-withdrawal? Is that the worst that can happen?

I will, of course, correct the under-withdrawal this year - won't that show good faith?

Even if I did file F5329s, I'm not sure I need to bother with a waiver request, since the penalty is so small on the $100 under-withdrawal.

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celia
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Re: Tax issue: Made a mistake on Inherited IRA RMDs for five years

Post by celia » Wed Oct 11, 2017 4:21 pm

Small Law Survivor wrote:
Wed Oct 11, 2017 8:32 am
My question: am I assessing this problem correctly? Am I missing anything?
I see this a little differently.

The IRA custodians are supposed to calculate the official RMD each year and tell the account holder what it is each January. Did your wife ever get a notice for any of the years? It could even have been part of the year-end statement. Then you would have seen that you were planning to withdraw a different amount. Didn't it ever occur to you that there was a difference and then call up to find out why?

The custodian has to report the previous-year RMD to the IRS each year along with the amount that was withdrawn for that year. This is part of their reporting requirement on each IRA they held for the year. So the IRS has had the information all along and could have contacted you but may have chosen not to. (A likely reason is that they are after bigger errors to find ways to bring in more money.)

Gill
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Re: Tax issue: Made a mistake on Inherited IRA RMDs for five years

Post by Gill » Wed Oct 11, 2017 4:30 pm

Take the future withdrawals correctly and don’t look back. You won’t hear from the IRS and the difference is immaterial.
Gill

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F150HD
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Re: Tax issue: Made a mistake on Inherited IRA RMDs for five years

Post by F150HD » Wed Oct 11, 2017 5:21 pm

celia wrote:
Wed Oct 11, 2017 4:21 pm
The IRA custodians are supposed to calculate the official RMD each year and tell the account holder what it is each January. Did your wife ever get a notice for any of the years?
That was my question. I know VG does this for you.

Gill
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Re: Tax issue: Made a mistake on Inherited IRA RMDs for five years

Post by Gill » Wed Oct 11, 2017 6:53 pm

F150HD wrote:
Wed Oct 11, 2017 5:21 pm
celia wrote:
Wed Oct 11, 2017 4:21 pm
The IRA custodians are supposed to calculate the official RMD each year and tell the account holder what it is each January. Did your wife ever get a notice for any of the years?
That was my question. I know VG does this for you.
There is no requirement that the custodian calculate the RMD and the account holder has the ultimate responsibility.
Gill

MarkNYC
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Re: Tax issue: Made a mistake on Inherited IRA RMDs for five years

Post by MarkNYC » Wed Oct 11, 2017 7:10 pm

F150HD wrote:
Wed Oct 11, 2017 5:21 pm
celia wrote:
Wed Oct 11, 2017 4:21 pm
The IRA custodians are supposed to calculate the official RMD each year and tell the account holder what it is each January. Did your wife ever get a notice for any of the years?
That was my question. I know VG does this for you.
For IRA owners subject to RMDs, the custodian must send the account owner by the end of January the following year, a notice that either states the amount of the RMD or offers to calculate it for the participant. But this only applies to owners of IRA accounts, not to beneficiaries of inherited IRAs.
Beneficiaries are responsible for their own RMD calculation.

Small Law Survivor
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Re: Tax issue: Made a mistake on Inherited IRA RMDs for five years

Post by Small Law Survivor » Wed Oct 11, 2017 7:21 pm

The IRA custodians are supposed to calculate the official RMD each year and tell the account holder what it is each January. Did your wife ever get a notice for any of the years? It could even have been part of the year-end statement. Then you would have seen that you were planning to withdraw a different amount. Didn't it ever occur to you that there was a difference and then call up to find out why?
No, Vanguard never did this - in fact, I believe we asked Vanguard to help us calculate RMDs when my wife inherited this IRA, and they said they did not do this for inherited IRAs.

Gill
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Re: Tax issue: Made a mistake on Inherited IRA RMDs for five years

Post by Gill » Wed Oct 11, 2017 7:34 pm

Small Law Survivor wrote:
Wed Oct 11, 2017 7:21 pm
The IRA custodians are supposed to calculate the official RMD each year and tell the account holder what it is each January. Did your wife ever get a notice for any of the years? It could even have been part of the year-end statement. Then you would have seen that you were planning to withdraw a different amount. Didn't it ever occur to you that there was a difference and then call up to find out why?
No, Vanguard never did this - in fact, I believe we asked Vanguard to help us calculate RMDs when my wife inherited this IRA, and they said they did not do this for inherited IRAs.
As several of us have pointed out, it's the account holder's job.
Gill

MarkNYC
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Re: Tax issue: Made a mistake on Inherited IRA RMDs for five years

Post by MarkNYC » Wed Oct 11, 2017 7:38 pm

Small Law Survivor wrote:
Wed Oct 11, 2017 7:21 pm
The IRA custodians are supposed to calculate the official RMD each year and tell the account holder what it is each January. Did your wife ever get a notice for any of the years? It could even have been part of the year-end statement. Then you would have seen that you were planning to withdraw a different amount. Didn't it ever occur to you that there was a difference and then call up to find out why?
No, Vanguard never did this - in fact, I believe we asked Vanguard to help us calculate RMDs when my wife inherited this IRA, and they said they did not do this for inherited IRAs.
The reason custodians are not required to calculate RMDs for beneficiaries of inherited IRAs is that they often lack the information needed. Suppose I inherit an IRA from a cousin who previously inherited it from his father. How could the custodian calculate my RMD without knowing (1) the date of birth of my deceased cousin and (2) the year he inherited the IRA from his deceased father?

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Flobes
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Re: Tax issue: Made a mistake on Inherited IRA RMDs for five years

Post by Flobes » Wed Oct 11, 2017 7:48 pm

Small Law Survivor wrote:
Wed Oct 11, 2017 7:21 pm
The IRA custodians are supposed to calculate the official RMD each year and tell the account holder what it is each January. Did your wife ever get a notice for any of the years? It could even have been part of the year-end statement. Then you would have seen that you were planning to withdraw a different amount. Didn't it ever occur to you that there was a difference and then call up to find out why?
No, Vanguard never did this - in fact, I believe we asked Vanguard to help us calculate RMDs when my wife inherited this IRA, and they said they did not do this for inherited IRAs.
Vanguard sends me an RMD notice very early each year for my Inherited Non-Spouse IRA.

Also, when I log in, I can see not only the RMD dollar amount but also how it was computed (birthday, factor, 12/31 balance, etc) and RMD history.

Is yours there? My Account. => Retirement contributions, distributions & RMDs. => RMD tab.

BarbK
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Re: Tax issue: Made a mistake on Inherited IRA RMDs for five years

Post by BarbK » Wed Oct 11, 2017 9:11 pm

Flobes wrote:
Wed Oct 11, 2017 7:48 pm


Vanguard sends me an RMD notice very early each year for my Inherited Non-Spouse IRA.

Also, when I log in, I can see not only the RMD dollar amount but also how it was computed (birthday, factor, 12/31 balance, etc) and RMD history.

Is yours there? My Account. => Retirement contributions, distributions & RMDs. => RMD tab.
I also have an inherited non-spouse IRA at Vanguard and I get a notice every year as well.

For your problem, I would do it correctly starting 2017 and forget the past. Those amounts are not worth the effort for you or the IRS.

Small Law Survivor
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Re: Tax issue: Made a mistake on Inherited IRA RMDs for five years

Post by Small Law Survivor » Wed Oct 11, 2017 9:47 pm

Also, when I log in, I can see not only the RMD dollar amount but also how it was computed (birthday, factor, 12/31 balance, etc) and RMD history.

Is yours there? My Account. => Retirement contributions, distributions & RMDs. => RMD tab.
Accessed that page, but it has "N/A" beside the RMD. Maybe we'll ask Vanguard why this is so.

Afty
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Re: Tax issue: Made a mistake on Inherited IRA RMDs for five years

Post by Afty » Thu Oct 12, 2017 1:42 am

I’ll also chime in and say that Vanguard does calculate the RMD account for my inherited IRA.

ryman554
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Re: Tax issue: Made a mistake on Inherited IRA RMDs for five years

Post by ryman554 » Thu Oct 12, 2017 8:13 am

Small Law Survivor wrote:
Wed Oct 11, 2017 3:31 pm
Thanks for suggestions above - however, keep in mind that this was a $15,000 inherited IRA. I have created a spreadsheet showing the actual RMDs and the "correct" RMDs, and the total difference over the five year period is about $100.

I guess I'm wondering whether this is so de minimis that it's not worth going to the trouble of preparing F5329s for each of these years. I mean, what is the risk the IRS will ever bother with this? Don't they have bigger fish to fry? And, if the IRS does focus on this, what's are the consequences? A 50% penalty on $100 under-withdrawal? Is that the worst that can happen?

I will, of course, correct the under-withdrawal this year - won't that show good faith?

Even if I did file F5329s, I'm not sure I need to bother with a waiver request, since the penalty is so small on the $100 under-withdrawal.
You have the spreadsheet, so presumably you have done all the hard work for the 5239. Perhaps you can look at filling out the forms as a "check your work" step. Might as well go the extra step and send off the forms and request forgiveness of penalty.

It's up to you if you want to follow the law. It's not a big deal for you or the IRS, and the outcome is likely the same whether you file 5239 or not. Still, I'm a guy who likes these loose ends tied up nicely.

westrichj312
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Re: Tax issue: Made a mistake on Inherited IRA RMDs for five years

Post by westrichj312 » Thu Oct 12, 2017 8:25 am

for such a small amount why would you take the every year route with the RMD's. Just take it all year one pay the tax its not worth the trouble as your going to pay the tax anyways.

Spirit Rider
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Re: Tax issue: Made a mistake on Inherited IRA RMDs for five years

Post by Spirit Rider » Thu Oct 12, 2017 10:13 am

westrichj312 wrote:
Thu Oct 12, 2017 8:25 am
for such a small amount why would you take the every year route with the RMD's. Just take it all year one pay the tax its not worth the trouble as your going to pay the tax anyways.
Let me ask you this question. Why do people make tax deferred contributions in the first place? To increase their tax deferred savings. Short of some specific need it is always better to take only the RMDs from an inherited retirement account.

Why not tell people to not make an $18K employee deferral this year. After all, its such a small amount, you don't need the tax benefit and trouble, you are going to pay the tax anyway

gotlucky
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Re: Tax issue: Made a mistake on Inherited IRA RMDs for five years

Post by gotlucky » Thu Oct 12, 2017 6:12 pm

westrichj312 wrote:
Thu Oct 12, 2017 8:25 am
for such a small amount why would you take the every year route with the RMD's. Just take it all year one pay the tax its not worth the trouble as your going to pay the tax anyways.
Let's say I'm taking RMDs from a "small" inherited IRA now while I'm in my peak earning years. In CA, my marginal tax rate can be 50%, so withdrawing all the $10k would lead to a $5k tax liability.

If I know in a few years I can retire early with no income, I can elect at that time to withdraw all the funds in the inherited IRA and pay almost no tax. I'll save the tax I would have paid today plus tax-free returns all those years.

I'd say that's worth the hassle.

Plus, the bright side of RMDs is that they can be used as estimated payments that were paid through the year even though you may take them as late as Dec 31. You can withhold 100% of the RMD as a tax payment and the IRS considers it like quarterly payments.

Spirit Rider
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Re: Tax issue: Made a mistake on Inherited IRA RMDs for five years

Post by Spirit Rider » Thu Oct 12, 2017 6:26 pm

gotlucky wrote:
Thu Oct 12, 2017 6:12 pm
Plus, the bright side of RMDs is that they can be used as estimated payments that were paid through the year even though you may take them as late as Dec 31. You can withhold 100% of the RMD as a tax payment and the IRS considers it like quarterly payments.
Sometimes, I personally think this ability to use RMDs for tax withholding is one of the bigger benefits of inherited retirement accounts. It is better than quarterly payments, because as you said the IRA treats withholding as treated equally throughout the year.

westrichj312
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Re: Tax issue: Made a mistake on Inherited IRA RMDs for five years

Post by westrichj312 » Fri Oct 13, 2017 8:20 am

I am assuming this is an inherited annuity ira right? because an inherited regular $18,000 ira has no taxes what so ever (step-up value) the rules for taking RMD's from an annuity are very different and you are not avoiding the taxes till retirement.

ryman554
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Re: Tax issue: Made a mistake on Inherited IRA RMDs for five years

Post by ryman554 » Fri Oct 13, 2017 8:26 am

Spirit Rider wrote:
Thu Oct 12, 2017 6:26 pm
gotlucky wrote:
Thu Oct 12, 2017 6:12 pm
Plus, the bright side of RMDs is that they can be used as estimated payments that were paid through the year even though you may take them as late as Dec 31. You can withhold 100% of the RMD as a tax payment and the IRS considers it like quarterly payments.
Sometimes, I personally think this ability to use RMDs for tax withholding is one of the bigger benefits of inherited retirement accounts. It is better than quarterly payments, because as you said the IRA treats withholding as treated equally throughout the year.
OK, now you have me intrigued. Can I take this to the logical conclusion and somehow force W4 into withholding $0 in state and federal taxes over the year on a large-ish salary (> $150k) and then "withhold it" at the end of the year (or the beginning, for that matter, to put into a safe harbor) via a large inherited IRA?

westrichj312
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Re: Tax issue: Made a mistake on Inherited IRA RMDs for five years

Post by westrichj312 » Fri Oct 13, 2017 8:26 am

OMG ignor my last post I did not see the IRA designation I was just assuming it was a inherited mutual fund.

kaneohe
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Re: Tax issue: Made a mistake on Inherited IRA RMDs for five years

Post by kaneohe » Fri Oct 13, 2017 10:29 am

ryman554 wrote:
Fri Oct 13, 2017 8:26 am
Spirit Rider wrote:
Thu Oct 12, 2017 6:26 pm
gotlucky wrote:
Thu Oct 12, 2017 6:12 pm
Plus, the bright side of RMDs is that they can be used as estimated payments that were paid through the year even though you may take them as late as Dec 31. You can withhold 100% of the RMD as a tax payment and the IRS considers it like quarterly payments.
Sometimes, I personally think this ability to use RMDs for tax withholding is one of the bigger benefits of inherited retirement accounts. It is better than quarterly payments, because as you said the IRA treats withholding as treated equally throughout the year.
OK, now you have me intrigued. Can I take this to the logical conclusion and somehow force W4 into withholding $0 in state and federal taxes over the year on a large-ish salary (> $150k) and then "withhold it" at the end of the year (or the beginning, for that matter, to put into a safe harbor) via a large inherited IRA?
There is this little matter of signing the W-4 :

7 I claim exemption from withholding for 2017, and I certify that I meet both of the following conditions for exemption.
• Last year I had a right to a refund of all federal income tax withheld because I had no tax liability, and
• This year I expect a refund of all federal income tax withheld because I expect to have no tax liability.
If you meet both conditions, write “Exempt” here . . . . . . . . . . . . . . . ▶ 7
Under penalties of perjury, I declare that I have examined this certificate and, to the best of my knowledge and belief, it is true, correct, and complete.
Employee’s signature
(This form is not valid unless you sign it.) ▶

ryman554
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Re: Tax issue: Made a mistake on Inherited IRA RMDs for five years

Post by ryman554 » Fri Oct 13, 2017 12:18 pm

kaneohe wrote:
Fri Oct 13, 2017 10:29 am
ryman554 wrote:
Fri Oct 13, 2017 8:26 am

OK, now you have me intrigued. Can I take this to the logical conclusion and somehow force W4 into withholding $0 in state and federal taxes over the year on a large-ish salary (> $150k) and then "withhold it" at the end of the year (or the beginning, for that matter, to put into a safe harbor) via a large inherited IRA?
There is this little matter of signing the W-4 :

7 I claim exemption from withholding for 2017, and I certify that I meet both of the following conditions for exemption.
• Last year I had a right to a refund of all federal income tax withheld because I had no tax liability, and
• This year I expect a refund of all federal income tax withheld because I expect to have no tax liability.
If you meet both conditions, write “Exempt” here . . . . . . . . . . . . . . . ▶ 7
Under penalties of perjury, I declare that I have examined this certificate and, to the best of my knowledge and belief, it is true, correct, and complete.
Employee’s signature
(This form is not valid unless you sign it.) ▶
Well, yes, but that is not the only way to get to $0 withholding. One *could* claim 1,000,000 exemptions or something ridiculous. I know the IRS frowns on this by starting to put you on a "lock-in letter", since it's also being driven by not withholding enough, but the RMD withholding strategy provides the correct amount.

It would be an interesting discussion with the IRS representative about this.

JohnTN
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Re: Tax issue: Made a mistake on Inherited IRA RMDs for five years

Post by JohnTN » Fri Oct 13, 2017 1:59 pm

I made this exact same mistake for 8 years and underpaid by $130 over that time period. After discovering the mistake I began using the correct factor from then on without going back an making any adjustment or corrections. Your error is so small I wouldn't worry about it. Just do it correctly going forward.

Spirit Rider
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Re: Tax issue: Made a mistake on Inherited IRA RMDs for five years

Post by Spirit Rider » Fri Oct 13, 2017 4:20 pm

ryman554 wrote:
Fri Oct 13, 2017 12:18 pm
Well, yes, but that is not the only way to get to $0 withholding. One *could* claim 1,000,000 exemptions or something ridiculous. I know the IRS frowns on this by starting to put you on a "lock-in letter", since it's also being driven by not withholding enough, but the RMD withholding strategy provides the correct amount.

It would be an interesting discussion with the IRS representative about this.
I don't think there would be any discussion at all. I'll use an analogy to the report we used in the Navy 40 years ago. "First indication of trouble or failure", will be the lock-in letter. The IRS doesn't "engage in discussions" unless you are already being audited in person. The IRS is way different than any other process. You are presumed guilty unless you can prove your innocence. For example, generally your first indication of trouble or failure with 1099 forms (whatever flavor), will be a CP-2000 notice, "You owe us money, send it now or prove you don't owe it.

There is a big difference between using the last month IRA distribution's withholding in place of quarterly estimated payments for taxes due on non-wage income and intentionally reducing your withholding to catch up with the IRA withholding. The latter looks pretty much like doing the same thing with your withholding and then increasing your withholding over the last month to satisfy one of your safe harbors.

I guarantee this will get you noticed and maybe the dreaded "lock-in" letter. I know several former colleagues, who are still under lock-in many, many years after the fact. Stupidity can be contagious and people don't realize that the IRS doesn't necessarily react right away. For example, the earliest the IRS tends to send CP-2000 notices is about one year after the tax extension deadline for a given year tax year. Sometimes it can be 2-3 years or more.

Small Law Survivor
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Re: Tax issue: Made a mistake on Inherited IRA RMDs for five years

Post by Small Law Survivor » Fri Oct 13, 2017 4:34 pm

JohnTN wrote:
Fri Oct 13, 2017 1:59 pm
I made this exact same mistake for 8 years and underpaid by $130 over that time period. After discovering the mistake I began using the correct factor from then on without going back an making any adjustment or corrections. Your error is so small I wouldn't worry about it. Just do it correctly going forward.
Thank you - and others who made this recommendation. I will do this.

kaneohe
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Re: Tax issue: Made a mistake on Inherited IRA RMDs for five years

Post by kaneohe » Fri Oct 13, 2017 6:28 pm

Small Law Survivor wrote:
Fri Oct 13, 2017 4:34 pm
JohnTN wrote:
Fri Oct 13, 2017 1:59 pm
I made this exact same mistake for 8 years and underpaid by $130 over that time period. After discovering the mistake I began using the correct factor from then on without going back an making any adjustment or corrections. Your error is so small I wouldn't worry about it. Just do it correctly going forward.
Thank you - and others who made this recommendation. I will do this.
perhaps this will give you some comfort:

As of 2016, the IRS has requested that if a taxpayer discovers $200 or less of missed income, after filing, that
no amended return be prepared. Instead, the taxpayer should wait for a letter from the IRS. (As noted below,
the taxpayer may have the option of simply accepting the IRS calculation of how much additional tax is owed,
as stated on an adjustment letter from the IRS, and mailing a check for that amount.)

gotlucky
Posts: 108
Joined: Mon Jul 16, 2012 2:44 pm

Re: Tax issue: Made a mistake on Inherited IRA RMDs for five years

Post by gotlucky » Fri Oct 13, 2017 8:14 pm

ryman554 wrote:
Fri Oct 13, 2017 8:26 am
OK, now you have me intrigued. Can I take this to the logical conclusion and somehow force W4 into withholding $0 in state and federal taxes over the year on a large-ish salary (> $150k) and then "withhold it" at the end of the year (or the beginning, for that matter, to put into a safe harbor) via a large inherited IRA?
My understanding is that any funds withheld from RMDs are considered withheld in 4 equal quarterly installments. I wouldn't falsify any W4s, but if you receive solely non-salary income you can likely safely withhold your entire tax liability at the end of the year via RMD-withholding.

ryman554
Posts: 808
Joined: Sun Jan 12, 2014 9:44 pm

Re: Tax issue: Made a mistake on Inherited IRA RMDs for five years

Post by ryman554 » Sat Oct 14, 2017 2:24 pm

Spirit Rider wrote:
Fri Oct 13, 2017 4:20 pm
ryman554 wrote:
Fri Oct 13, 2017 12:18 pm
Well, yes, but that is not the only way to get to $0 withholding. One *could* claim 1,000,000 exemptions or something ridiculous. I know the IRS frowns on this by starting to put you on a "lock-in letter", since it's also being driven by not withholding enough, but the RMD withholding strategy provides the correct amount.

It would be an interesting discussion with the IRS representative about this.
There is a big difference between using the last month IRA distribution's withholding in place of quarterly estimated payments for taxes due on non-wage income and intentionally reducing your withholding to catch up with the IRA withholding. The latter looks pretty much like doing the same thing with your withholding and then increasing your withholding over the last month to satisfy one of your safe harbors.
Aha. In fact, I don't think that it looks similar to your example, I think it is exactly like the example, which apparently (under further review) is one of the reasons lock-in letters exist.

Your summary sounds about right concerning how the "discussion" with the IRS would go. I will file your Navy reference away for future use in my current career. I like it.

Thanks..

testing321
Posts: 146
Joined: Sat Oct 25, 2014 6:46 pm
Location: kansas city

Re: Tax issue: Made a mistake on Inherited IRA RMDs for five years

Post by testing321 » Sat Oct 14, 2017 3:11 pm

Gill wrote:
Wed Oct 11, 2017 4:30 pm
Take the future withdrawals correctly and don’t look back. You won’t hear from the IRS and the difference is immaterial.
Gill
I second this.

spitty
Posts: 104
Joined: Sat Apr 09, 2016 7:01 am

Re: Tax issue: Made a mistake on Inherited IRA RMDs for five years

Post by spitty » Sat Oct 21, 2017 11:27 am

I just read through this thread and find it very interesting! So I wonder at what dollar amount non-5329 filers would actually claim the delinquent amount? It seems that if one starts withdrawing and claiming at least some amount the year of an inheritance, the IRS will be satisfied. Year end totals of inherited accounts aren't reported and values can change wildly depending on how they're invested so IRS has no idea what they're worth. You could get caught with a random audit but if you've used the correct factor the past 3 years they'd be unlikely to find the incorrect factor used for 5 years prior to that. If the delinquent amount were say $20,000 over 10 years on a nest egg that stays consistently at $1 mill, how many would ignore it--just start using the correct factor and figure "they'll never know"? Seems it may be worth the risk.

Spirit Rider
Posts: 6627
Joined: Fri Mar 02, 2007 2:39 pm

Re: Tax issue: Made a mistake on Inherited IRA RMDs for five years

Post by Spirit Rider » Sat Oct 21, 2017 12:36 pm

spitty wrote:
Sat Oct 21, 2017 11:27 am
I just read through this thread and find it very interesting! So I wonder at what dollar amount non-5329 filers would actually claim the delinquent amount? It seems that if one starts withdrawing and claiming at least some amount the year of an inheritance, the IRS will be satisfied. Year end totals of inherited accounts aren't reported and values can change wildly depending on how they're invested so IRS has no idea what they're worth. You could get caught with a random audit but if you've used the correct factor the past 3 years they'd be unlikely to find the incorrect factor used for 5 years prior to that. If the delinquent amount were say $20,000 over 10 years on a nest egg that stays consistently at $1 mill, how many would ignore it--just start using the correct factor and figure "they'll never know"? Seems it may be worth the risk.
Your bolded statement is not correct. Under 5498 instructions, the trustee of an Inherited IRA must issue a 5498 every year, reporting who the IRA was inherited from and the year-end FMV.

Finally, It is against forum policy to advocate deliberate tax evasion.

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