Missed RMDs for inherited IRA

[Kea]

Client inherited IRA from his mother in 2011. Bank recently realized they were supposed to be distributing RMD. They have recently issued a 1099R for 2011 and told him to ask me if this would require amending the 2011 return or how it would be reported.

Note- I have not seen the documents yet & don't think the bank would put it on a 2011 1099R if the money was distributed in 2013. Client will bring them to me Saturday.

I know that missed RMD result in 50% tax, but I have not actually had to deal with this situation before. Any advice about how to proceed is welcome. I assume if the 1099R was issued for 2011 that would need to be corrected to 2013.

[JohnH]

Looks like the bank is going to be on the hook for the penalty.

Or else they should l lose a customer.

[Kea]

I'm hoping the bank will take care of the penalties. I just want to make sure everything gets reported for the proper year(s).

[Jack from Ohio]

I'm hoping the bank will take care of the penalties. I just want to make sure everything gets reported for the proper year(s).

I have a steak dinner that says the bank won't pay the penalties. You should write a letter asking for abatement and explain the situation. First time offenses are usually granted, but with the latest stuff I see from the IRS, I would not count on it like we used to be able to.

[Guest Taxed]

Document all the interaction with the bank to prove they screwed up. If bank fails to make some restitution you can always approach your state's banking division, or comptroller of Currency if it is a federally chartered bank for help. Taxpayer is always liable for the actual tax it is the penalties and interest that the bank should take care of.

[Kea]

Thanks for the penalty suggestions. I'll discuss them with the client on Saturday.

But now that the bank is distributing the originally missed amounts - does that cause 2011 to be amended or does it go on 2013?

He is cash basis, so I would "assume" it goes on 2013. But he said the 1099R says 2011. Is that something else that the bank will have to correct? Or, did they do that part correctly?

[JohnH]

I think you have to take the bank documentation at its face value. After all, that's what they are sending to the IRS and it's what the AUR system will be looking for. So if the 1099-R says 2011, then you'll need to amend 2011. The bank should pay your fee for that as well, but to paraphrase what Jack said, - "good luck with that one."

[Guest Taxed]

In my experience the large multi-national banks are the worst in making it up when they mess up! You really have to fight with them on all fronts to get any restitution.

I left Bank of America when they started on their cost cutting measures and went to a local bank for my business account. Get free checks, $5000 over draft included. The only downside is that if I am out of state I need to find a SUM network to make ATM withdrawal without the additional fee.

[Cathy]

Kea,

RMD's withdrawals for a beneficiary have separate rules. Review the rules for a non-spouse beneficiary before you decide anything. Normally, the first distribution is not required until the year AFTER the death of the original owner.

And also the rules are different if the owner had reached the point to where RMD's were necessary.

Use Form 5329 with an explanation attached to tell IRS what changes have been made (usually automatic withdrawals) to assure them that the same thing will not happen again.

As to whether it's the bank's responsibility, I disagree. The beneficiary has the responsibility of taking the RMD whether it's required by 12-31 of the following year or within the 5 year time frame. Again, the rules will vary. An executor and/or attorney if probate was necessary holds as much responsibility as the taxpayer, however, the penalty is responsibility of the taxpayer.

I always ask whether or not my client has an inherited IRA. Not everyone will, but it happens more times than you think and will continue now that the boomers are aging.

[Kea]

Thanks so much for all the advice! I really appreciate it.

This is actually a credit union. They are not "small" as they have several branches. But they are nowhere near as big as a Bank of America. I'm hoping the credit union will pay the fees - I think there is a chance. But no, I'm not "banking" on it. (Sorry, I couldn't resist!)

[Guest Taxed]

I think most credit union's (at least the smaller ones) farm out the work.

My credit union farms out all 1099-R preparation to a TPA. This year I had 2 clients whose state refunds were held up because the TPA did not put the state ID# in the box 13 for state witholding. The credit union offered the client up to $100 to have me respond to the state DOR letters and they provided a letter with the correct info for box 13.

So if your client takes up the matter with the manager of the CU, there is a possibility of some restitution.

[Kea]

Sounds good. I hope so. I know one of the officers (not sure if that's the right title) there, so I think there is a decent chance. We'll see. (fingers crossed!) That officer is actually the one who referred the client to me in the first place.

[Randall]

I agree with Cathy. If inherited in 2011, first RMD was not due until 12/31/12. So you could probably just amend 2012. Best chance is to try to get penalties waived by IRS.

[Kea]

I'll find out today what year the credit union used for the 1099R. I agree that the first RMD should have been for 2012. But if they used 2011, does that cause any problems.

When I file the amendment, do I need to calculate the penalty or does the IRS calculate it and send a bill?

[jainen]

>>how to proceed is welcome<<

See the last page of the Instructions for Form 5329 to request waiver of the penalty tax.

[Kea]

Thanks jainen!

[jainen]

>>Thanks<<

Sure thing! Note that you file as if the penalty doesn't apply. They only have to pay if it's denied, and I think you have good reasonable cause in the error by the financial institution. I usually argue that the taxpayer is responsible for RMD, because the credit union can't know whether there are other accounts. But I can't see IRS enforcing that in the first year of an inheritance. After all, the Instructions for Form 5329 do say, "Your plan administrator should figure the amount that must be distributed each year."

In fact the regulations say approval is automatic if the following (which I'm too addle-brained this morning to translate) is the case.

(1) The payee described in section 4974(a) is an individual who is the sole beneficiary and whose required minimum distribution amount for a calendar year is determined under the life expectancy rule described in §1.401(a)(9)-3 A-3 in the case of an employee's or individual's death before the employee's or individual's required beginning date; and

(2) The employee's or individual's entire benefit to which that beneficiary is entitled is distributed by the end of the fifth calendar year following the calendar year that contains the employee's or individual's date of death.

Meanwhile, I think the credit union is still doing it wrong. This is not a return of excess contribution, described in the Instructions for Form 1099-R as taxable income in the prior year where it was already deducted. This is a corrective RMD taxable in the current year. Form 5329 can be filed stand-alone without amending because there is no change to taxable income in the prior year, just a (potential) penalty.

[joanmcq]

I agree with jainen, and issuing a 2011 1099-R just compounds the screwup. Your client will have to take both the 2012 & 2013 RMDs this year. File as though no penalty, and if one is assessed, there is grounds for abatement. A 2011 withdrawal is only required if the original owner had reached 70.5 and did not take their RMD in 2011.

[Jack from Ohio]

Consider this.......

Washington, D.C. (May 31, 2013)

By Michael Cohn

The Internal Revenue Service has modified its “first time abate” policy, which provides a one-time consideration of penalty relief, based on the taxpayer’s compliance history, for taxpayers who have been subjected to a first-time penalty charge.

The recently updated policy modifies the IRS first time abate policy for penalty relief, the IRS said in an email to tax professionals Friday. This type of penalty removal is a one-time consideration available only for a first-time penalty charge and based on taxpayers’ compliance history.

According to the policy, the FTA penalty relief option for failure to file, failure to pay and failure to deposit penalties, under certain conditions, does not apply if the taxpayer has not filed all returns and paid, or arranged to pay, all tax currently due. For example, the taxpayer is considered current if they have an open installment agreement and are current with their installment payments.

The FTA relief only applies to a single tax period for a taxpayer, the IRS noted. For example, if a request for penalty relief is being considered for two or more periods of a taxpayer, and the earliest period meets the FTA criteria, FTA would apply only to the earliest period, and not for all periods.

Penalty relief under the first time abatement provision does not apply to returns with an event-based filing requirement, such as Form 706, U.S. Estate Tax Return; Form 709, U.S. Gift (and Generation-Skipping Transfer) Tax Return; Form 1120, U.S. Corporation Income Tax Return; and Form 1120S, U.S. Income Tax Return for an S Corporation if, in the prior three years, at least one Form 1120S was filed late but not penalized. This list is not all-inclusive, the IRS cautioned.

The IRS said it would base decisions on removing any future failure to file, failure to pay or failure to deposit penalties on any information taxpayers provide that meets reasonable cause criteria.

Taxpayers who have been billed for penalty charges who feel they have reasonable cause, should send their explanations with their bill to their service center or call the IRS at (800) 829-1040 for assistance. Taxpayers may also use Form 843, Claim for Refund and Request for Abatement.

It appears to me that the IRS is moving toward no forgiveness at all.... Just something to keep in mind. The safety net we have depended on for so long is being taken down. This means more diligence on our part and convincing our clients of the same.

Here is a link to the entire article: http://www.accountingtoday.com/news/IRS-Modifies-Policy-First-Time-Penalty-Relief-66969-1.html?ET=webcpa:e7182:477442a:&st=email&utm_source=editorial&utm_medium=email&utm_campaign=tpt_060313&taxpro

[jainen]

>>File as though no penalty, and if one is assessed, there is grounds for abatement.<<

Sorry, I did consider my mis-use of the word "penalty" but I took the low road. Actually the issue is an excise tax, not a penalty, so the relief is a waiver, not abatement. Form 5329 for 2012 MUST be filed as soon as possible (and the 2012 RMD distributed ASAP, even though 2013 can wait until December). I only meant "as if the penalty didn't apply" in the sense of the marginal entry on Line 52 offsetting the shortfall. If you wait for the additional tax to be assessed, you may have to go to Appeals because the abatement procedure won't be available.

[Kea]

Thanks for all the info. I just knew this would not be a "simple fix" on my part. This gives me a lot to work with.

In this case the ORIGINAL owner was the client's father who passed away in 2010 (in his 90s and was presumably taking RMD). The mother inherited and passed away in 2011. I will have to check the status of any RMD for 2011 to Mom with the client. Perhaps the credit union is trying to adjust the RMD for Mom rather than for my client? I need to see the actual documents. I just wanted to make sure I understood all the tax rules / implications before meeting with the client.

[Cathy]

Kea,

I believe it's Pub 570......then check the section "inherited IRA". The additional information you have now will certainly help you. Also, I'd search the pub for the info on RMD's for the owner in the year of his/her death. As it seems the credit union might be lacking in info regarding these types of situations, the more you know, the better it will be for the client.

I once had to argue with a credit union about the legality of one of my elder clients being able to make a deductible contribution. It might just be a lack of training or possibly the number of IRA's they do each year versus a bank........possibly the quality of training for advice on inheritance laws in general and how they pertain to IRA's plays a big factor as well. I don't know about the state you are in but in Louisiana one can always renounce their inheritance and "forced heirship" is another hurdle that must be taken into consideration in cases such as this. That's why I'm surprised that the taxpayer or the attorney and/or the administrator of the estate weren't involved any more than it appears they were. There is of course, the possibility that the IRA was the only asset to pass to beneficiaries after the death of the mother.

Good luck and be on your toes with the credit union. If you find that they hurriedly made an incorrect withdrawal for your client, they can certainly go back and "fix" it, and don't let them tell you otherwise!

[Kea]

The plot thickens. There is a piece of the story that I had not previously included because I didn't think it was related and wanted to keep my questions as straightforward as possible.

When the client received the original 1099R for the 2011 tax return it was shown as a total distribution when, in fact, it had been rolled over to an inherited IRA. (Box 7 was correctly coded as "4" for death.) I did get a copy of the transaction for my files. I then entered it in the tax software - matching the 1099R and then indicating that the amount was rolled over.

Last month, while I was out of the country, the client received a CP2000 from IRS showing the amount as taxable. Since I had already shown the rollover in the tax return, I asked the client to fax or email me the CP2000. He doesn't have e-mail or fax (I suggested having the credit union send it to me for him). He did take the notice to the credit union to get additional documentation. Well, the credit union took over from there (even though I was still accessible by phone, fax & email - just not in person). They sent something to IRS - ? I had been under the impression that they sent a corrected 1099R and that I would be getting a copy of that tonight. (My plan was to discuss, with client's permission, to follow-up with IRS on Monday.)

A few days ago, the client let me know he had received the RMD and a 2011 1099R. When client brought CP2000 and 1099R to me, it turned out that the only 1099R is for the RMD, there is no corrected 1099R to show distribution was a rollover . They explained to him that his mother should have taken an RMD in 2011, but that didn't happen before she died. So, even though the RMD is for Mom, it's in client's name. And no RMD has been set up or mentioned for 2012 for client.

So in their trying to fix one problem they created more. I'll be discussing with the credit union & IRS next week. Thanks for the education! I'll need it.

[Guest Taxed]

Kea I may have said this before but keep good paper tracking because it appears from your latest post the CU may have issued the wrong 1099-R for 2011.

BTW how much was the min distribution? Perhaps the CU may find it more advantageous to pay the penalty and interest and get it over with rather than escalating this to a complaint with the regulatory body if they indeed messed up.

[Kea]

You are correct. It looks like there are errors all over the place. They 1099R for the RMD was only $678, so it should be minor for the CU to cover.

Yes, I'm keeping notes.