Missed RMD
Client took RMD’s from the inherited IRA in years 2001 – 2004. However, she did not take an RMD in 2005 and 2006 due to an oversight. She will be taking an RMD for 2007.
Client has been informed that RMD’s must be taken for 2005 and 2006 and that Federal and State penalties will apply, in addition to the income taxes that must be paid on the amounts distributed.
The question is- what is the process for taking the RMD’s for 2005 and 2006?
Should the client take the 2005 distribution based on account value as of 12/31/2004?
And then take the 2006 distribution based on account value as of 12/31/2005, but with the 2005 distribution and penalty removed?
Can she appeal the 50% penalty if she has a solid reason for missing the prior distributions?
Thank you for your assistance.
Permalink Submitted by Alan Spross on Thu, 2007-12-06 05:17
Yes, the client has a good chance of having the IRS excuse the 50% excess accumulation penalty.
The client should now take the RMD for 2005, 06 and 07 based on the actual unadjusted year end values of each prior year. These will all be reported and taxable in 2007.
Client should file a stand alone 5329 for 2005 and 06, with a request to excuse the penalty for the best reason that applies . A copy of the statement showing that these missed RMDs have been made up should be included to show good faith to the IRS that correction has been made as soon as client became aware of the omission. There is no need to send in the penalty when the request is filed, as used to be the case.
I am not aware of any state income tax penalties, as this is different than early withdrawal, where some states do have their own penalty. Therefore, if the request is successful, the only downside will be extra taxable income in 2007.