Missed RMDs for inherited IRA

[jainen]

>>Looks like I get to call IRS after all.<<

You MIGHT still be able to resolve this over the phone, but don't miss the 60 day deadline! Even if the IRS promises to rescind the notice and process the 1040X or whatever, don't believe them unless you have written agreement. At this point your client has no actual right to amend or appeal or even request the waiver of penalty. Filing with Tax Court is the only true option. That's a waste of money, because Tax Court will just kick it back to Appeals anyway. Talk to your client about it, because he has to file himself since you are not an attorney.

[Kea]

I'm sure they just crossed in the mail since I gave the forms to my client on the evening of Friday 7/26 & the IRS letter is dated the next Monday.

Thanks for the heads up Jainen. I'll see what advice they give me on the phone. I have no desire to go to tax court, but I do want to help my client get this resolved. I'm really getting concerned.

[Guest Taxed]

Good luck. Hopefully you will be able to speak to the examiner and clear it up.

Tax courts are expensive (attorney fees at $120/hr, plus expenses). I had only one business client who pursued the matter in Tax court and did finally prevail.

[jklcpa]

Taxed, where is this you speak of that attorneys charge as little as $120/hr? Even here in little old Wilmington the tax attorneys are charging $330/hr and up, at least the ones I've worked with lately and that I trust to send my clients to. If a client here wants a larger firm with national name recognition and goes to Philly, well the price is higher yet again.

[Kea]

I'm not sure a tax attorney would be worthwhile. The bill is currently $2155.

[Guest Taxed]

I should have mentioned this was a few years back like 2005. I have not priced one recently, and hope I don't have to.

You are right now it may be close to what you are seeing in your neck of the woods.

[jainen]

>>Tax courts are expensive <<

In my opinion, if you need a tax attorney, it is a good value. But Kea's client doesn't need an attorney. If he has to petition Tax Court it's only because he dinked around for a month before telling Kea about the CP2000. (Well, technically Kea wasn't available but that's no reason not to blame the client!)

There is a $60 filing fee (waived for indigents). That's what I meant is a waste, because Tax Court will certainly refer this case back to Appeals. There is no question other than plain facts, so it all depends on what can be documented. It's possible that AUR will accept what has already been sent in, but if not then Appeals will take quick and decisive action. I would guess it would go in the taxpayer's favor, if only because IRS can't afford to litigate such small amounts unless there is evidence of tax evasion or some other big principle.

My main worry is that Kea might not have been very clear--I barely followed the unfolding story. But Appeals gives you another shot at making your case, so if you can't prove it there, even a lawyer probably can't prove it in court.

[Guest Taxed]

What about the small case (less than 50K) Tax Court. Can a EA represent a client in that court or does it always have to be a tax attorney. I would NOT recommend any taxpayer representing themselves to save money. They may make their case worse??

[jainen]

>>Can a EA represent a client in that court <<

Tax Court has some procedure for an Enrolled Agent or CPA to be admitted to practice. It would be an interesting specialty, but hard to make a living. You would probably have to affiliate with a law firm, where you would be generally despised.

[Kea]

I'm an RTRP - not that it matters anymore.

[Lynn EA USTCP in Louisiana]

Non attorneys MAY be admitted to Practice before the Tax Court, after they pass the rigorous and grueling Tax Court exam which is administered every two years in Washington DC. The pass rate is very low, about 4 - 6%.

Enrolled Agents may represent the client once the Tax Court case is referred back to Appeals. Generally my clients, when filing their pro se tax court petitions, ask that for a case location at the local IRS Appeals Office. After the case is assigned a number, and sent to Appeals, the Appeals Officer has contacted me for appointment dates.

[Guest Taxed]

What has been your success rate at the Appeals Office?

[Lynn EA USTCP in Louisiana]

Ahhh, now that depends. For clients for whom I had prepared the returns, and had all pertinent documentation, I have had 'no change' results. For clients who self prepared, ignored all requests for documentation, etc., not so good.

In general, though, I have found Appeals very good to work with.

[TheFinanceWriter]

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.

Edited August 22, 2013 by jklcpa
deleted advertising link

[Kea]

The amount being assessed is based on the original 1099R from the credit union that indicated that the entire IRA was distributed to my client. It was not. It was converted to an inherited IRA. However the credit union did that conversion wrong and did not correct (correctly *) it until 2013 after the CP2000 was issued.

*There was a correction done in 2011 at the original transfer -- unfortunately that one was done wrong. I thought it was corrected properly at the time and that is why I prepared the 2011 return showing the amount as a rollover and not taxable. I know now that "rollover" was not the proper term.

When the credit union made the correction in 2013 they realized there should have been an RMD for the mother. Since my client is the only name on the account now, they issued a corrected 1099R showing the RMD instead of the entire IRA.

I hope that summary is more clear.

[jainen]

>>I hope that summary is more clear<<

I do not think it is clear. Maybe it makes more sense with the documents in front of you, because for one thing, I can't tell what 1099s were issued, when, or for what tax year. For another thing, I am confused by the original 2011 return referring to an undocumented rollover, and then responding to a CP2000 with a 1040X apparently restating the same position. I can't tell when or even if an RMD was really made. Frankly, I'm still not convinced that the IRA was actually maintained as an inherited IRA rather than being distributed in full. I'm not even convinced that's what the client intended to do. So I have to say that at this point the notice of deficiency sounds correct to me, at least in terms of failing to respond to the 30-day letter.

Now I suggest you write out a timeline. Each step should have a date and a complete sentence, but the sentence should have no more than five or six words. Somebody sending something and somebody receiving the same thing are two separate steps. Stack all the documents in chrono order and mark each as Exhibit A, B, C, etc., and add a reference on each step. Those documents should include everything relevant--not just the 1099s and tax returns, but your organizer or interview notes, whatever the client signed at the credit union, the IRS letters and your replies, your telephone notes with client and IRS. You don't need to copy this thread, but you should consider the trust, will, and/or beneficiary statement.

Meanwhile I think you should explain to the client about petitioning Tax Court (do some quick research first!) Trust me, the court will send this down to Appeals, but it might be the only way if AUR gives you idle promises or refuses outright to talk any more. Also discuss your client's other options, including just paying the deficiency in full or installments. (Presumably you can still get the penalty waived.) After all, it's going to be due in a couple of years anyway. Even if you win in the end, fighting the IRS is a big drag on the psyche.

Oh, and don't forget the state return.

[jklcpa]

>>I hope that summary is more clear<<

I do not think it is clear....

Now I suggest you write out a timeline. Each step should have a date and a complete sentence, but the sentence should have no more than five or six words. Somebody sending something and somebody receiving the same thing are two separate steps. Stack all the documents in chrono order and mark each as Exhibit A, B, C, etc., and add a reference on each step. Those documents should include everything relevant....

Jainen is correct on this handling. I have had 100% successful outcomes over many years when answering any correspondence with the IRS with this organized method. You must be succinct, very organized and get directly to the point. Make the trail of statements and documents being sent as organized and easy to follow as possible. Remember that the person on the receiving end hasn't had any clarifying conversations with the client or bank that you have. All they have is what is reported within their system, tax returns filed and your correspondence to make sense of it all.

[jainen]

>>All they have is what is reported within their system,<<

They probably don't even have all of that. Like, our XP computers can't access the new 1099 database. You have to think like a bureaucrat:

I don't actually know how to take notes. Last month they sent me to three days training on The New Shorthand. I'm already a week behind transcribing and can't remember what we talked about, so even I can't decipher it. My typing is lousy, especially on this ergonomic keyboard that idiot in IT salvaged when admin got their new offices. Well, my handwriting is worse. They don't let us use "personal items" like a decent pen. Besides, my supervisor was hired on some affirmative action program and can't even read English anyway. So don't expect whatever you tell me to show up in the record. It just says, Rep called--will send docs.

Docs. That's it. Nobody cares about your explanation. What they want is something to scan.

[Kea]

Thank you for all the great advice. I'm hoping that the IRS will find that what I sent with the CP2000 response on 7/26/13 is clear and succinct. For some things I do prefer a phone conversation so that I can clarify as necessary.

I spoke to a very nice person on the phone, and gave her the timeline of events. She said they did not yet have the response that was mailed 7/27/13, but was not surprised. She documented our conversation and said we should wait about a month. If my client has not yet received a follow-up lettter from IRS, then I should contact them again.

[jainen]

>>a very nice person on the phone... did not yet have the response... documented our conversation... we should wait... contact them again<<

I'm sorry to keep hammering on this. Maybe I am paranoid, but in my opinion NONE of that has any meaning whatsoever after a Notice of Deficiency has been issued. Read the notice itself, all of it, and see if what the IRS put in writing agrees with what the IRS said on the phone.

[kcjenkins]

Right on! When dealing with the IRS, you must be paranoid, not because they hate you, but simply because the next time you call them the odds are very high that you will NOT be able to talk to the same person. And so unless you have something IN WRITING you have no way to PROVE what you may have been told. Plus, they know, just like we know, that what WE are TOLD, and what the docs show, is often different. And even if it is only A LITTLE different, that difference could be critical.

[Kea]

Yes, I agree & yes, I am paranoid. I've never had to deal with this kind of situation before. I really do appreciate all the advice.

However, the CP2000 response was only mailed a week and a half ago. So, I'm not surprised that it is not in their system yet. I offered to fax the reply to her. She said it would have to go to the Austin office. She suggested that faxing and mailing could cause confusion. But, I'm still willing to fax it if it will help.

I will stay on top of this and WILL NOT let this drag on until the October Tax Court deadline.

[kcjenkins]

That is all you can do. Good luck.

[Kea]

Thanks. I think I need all the luck I can get!

[joanmcq]

I'm a bit confused that you gave the notice back to the client to mail. I fax all responses into the AUR unit. Mailing is time consuming and can get lost much easier.

Since Kea is not an EA or CPA, she can't rep the client in appeals. Please correct me if I'm wrong.

For what it's worth though, I've had good luck with audit recon for clients who've ignored CP notices all the way to the 'we are going to levy certain assets' point.