Penalty for not taking RMD
If a client should have taken $10,000 RMD and he doesn’t take anything and receives the 50% penalty. How is that penalty paid? IE Billed/tax reporting/seperate invoice etc.? Does he still need to take the $10,000 out and pay income taxes on it? Or how would the above effect his taxes?
Permalink Submitted by Anonymous (not verified) on Wed, 2010-06-09 19:14
In theory, if you do not take your RMD you need to pay a 50% penalty on the shortfall (10K). Unless the IRS catches you, the taxpayer will pay the penalty proactively using Tax Form 5329. The RMD still needs to be taken out and is ofcourse taxed in the year the actual distribution is finally taken.
If your read the instructions of the 5329 you will find to a way to appeal the penalty by providing an explanation and request to excuse the penalty. This should be the first course of action. During this process the penalty does not need to be paid upfront. Chances are relatively good that the IRS will forgive the penalty, if the explanation is reasonable. I would be prepared to have some form of evidence about the events, since I do not know how stringent the follow-up is.
pko
Permalink Submitted by mk foss on Thu, 2010-06-10 00:53
The IRS cannot waive the 50% penalty unless the missed distribution is taken. For example if A discovers in March 2011, he missed his RMD for 2010 – he should take the missed amount immediately – then attach Form 5329 to the 2010 Form 1040 requesting a waiver without paying any penalty. IRS has been very good about waiving the penalties. I think it’s because the purpose of the penalty is to insure that RMDs are taken when required and if the shortfall is made up, there’s little left to penalize one for.
I agree with everything pko said about this.