I’m very curious about how this matter is resolved. Following a long thread like this one is confusing and I still wonder how the IRS assessment was determined. Is that additional tax owed on the 2011 distribution from the IRA? Or, is it entirely penalty and interest?
If the taxpayer received a 1099-R for 2011, then he must have received a distribution that year. The financial institution would issue the form for the year of constructive distribution, not the year that an RMD was required but undistributed. So…if the taxpayer received the RMD, no 50% penalty is assessed for the beneficiary failing to follow inherited IRA rules. Rather, the penalty is for underpayment of tax on the 2011 distribution.
Moreover, no 50% penalty is imposed on beneficiaries for simply failing to take the annual RMD from an inherited IRA... if the entire balance is distributed within 5 years. So, this taxpayer can still meet that deadline if no annual amounts have been taken from the account. (Of course, RMD apparently was taken – if the 1099-R is accurate.)
I think Kea would benefit from what I discovered in my tax career by studying for the Enrolled Agent exam at [advertising link deleted]. The extra tax knowledge possessed by Enrolled Agents permits them to better conquer complicated situations. Plus, an EA can represent taxpayers with IRS Appeals, which seems like the appropriate channel for resolving this mess. Again, please post how it eventually sorts out with the IRS.