Form 5329 Information
Just read this article from January and was interested in the last paragraph.
https://irahelp.com/slottreport/irs-releases-2014-form-5329-report-certain-ira-penalties
Should we be filing a zeroed out 5329 for everybody? And if so, the language on how to file says it can be filed as a standalone form if 1) no 1040 was filed in that year or 2) if 1040 was filed and you file the 5329 with a 1040X. But what if you want to file it for previous years in which a 1040 was filed BUT no changes need to be made?
Permalink Submitted by Alan - IRA critic on Thu, 2015-06-25 17:36
Technically, the vague IRS instructions are intended to require a 1040X when a 5329 is filed for a previous year for which a 1040 has already been filed. That said, some people submitting stand along 5329 forms never get a request for a 1040X, but some do. I am not a fan for filing a blank or 0 5329 simply to start a SOL. The IRS is likely to take this as a red flag and carefully check that tax return for excess contributions, an area where the IRS misses most of them. There might be a few specific cases where the SOL benefit exceeds the drawback of a red flag, but these situations would be unique and rare.
Permalink Submitted by John Bilts on Fri, 2015-06-26 02:25
But what makes many people (myself included) nervous is that there is no SOL without a 5329. Even if the IRS misses most of the errors now, they may get much better at catching them in the future. This concept is pretty insane. If you accidentally make an excess contribution and the IRS finds out say 10, 15, 20 years later, at a rate of 6% per year, the entire initial excess contribution would be penalized away. Just how sure can you be that there were no errors (even careful taxpayers and tax preparers can make mistakes every once in a while).
Permalink Submitted by Alan - IRA critic on Fri, 2015-06-26 03:08
I understand, but there is no indication that the IRS is levying multi year penalties. In fact, they do not even detect most excess contributions even though modified AGI should be easily calculated from the tax return. I have been addressing IRA related posts in various forums for the last decade and no one has ever reported the IRS levying the 6% excise tax for more than a couple years. Even if a current year excess contribution is detected which is an obvious clue that there might be many prior years of the same infraction, the IRS apparently does not look back to the older returns. A blank 5329 is just a red flag, or should be. There have been a few cases where the IRS has used the excess contribution excise tax in cases where the taxpayer did an improper rollover, such as the case that resulted in the latest restrictions of the rollover rules (Bobrow vs Commissioner). In that and similar cases the excess contribution tax was related to other infractions the taxpayer committed and were caught by the IRS.
Permalink Submitted by John Bilts on Fri, 2015-06-26 14:00
It’s definitely reassuring. I’m sure you’ve seen this article (http://www.morningstar.com/advisor/t/95455509/how-to-get-closure-on-ira-mistakes.htm?&single=true) but the gist is that the guy did an improper rollover and tried to claim the SOL had long passed, but of course didn’t file a 5329. The article actually goes so far as to say “I would not be surprised if eventually we hear of a malpractice case brought against a tax preparer because he did not automatically prepare Form 5329 each year for his IRA-owning clients.” Now that is truly scary. Also, based on your previous responses in this topic: https://irahelp.com/forum-post/22404-any-precedent-appealing-6-excise-tax-excess-roth-ira-contribution-foreign-income, I’m wondering if the 6% penalties each year can exceed the original excess contribution. It would seem that after about 16 years the entire amount would be penalized away. For the guy in that topic, if he never caught this error and the IRS found him when he retired, can he lose more than what he put in?
Permalink Submitted by Alan - IRA critic on Fri, 2015-06-26 16:36
It is possible that total excise taxes can exceed what was contributed, particularly if late interest is charged. 6% each year will exceed 100% after 17 years, and with late interest in less than 17 years. However, total excise taxes are also a function of the account earnings since in any given year the tax cannot exceed the account balance of all IRA accounts of the same type. Therefore, if the IRA has losses, and includes several excess contribution years, the total excise tax will be capped by the account balance but could still exceed the amounts contributed.
Permalink Submitted by John Bilts on Fri, 2015-06-26 21:27
I just read an interesting example from Ed Slott: http://www.investmentnews.com/article/20150420/FREE/150429992/tax-season-is-over-but-ira-fixes-can-still-be-made … Apparently “Al and Betty” were able to get a PLR to recharacterize all Roth from previous years into traditional IRAs. What is left out is – did they have to pay the 6% penalty on those extremely old contributions? (I’m leaning toward no since what’s the point of filing the PLR if you had to pay the penalty anyway?) And secondly, what if it wasn’t due to MAGI limits, but rather due to foreign income like the example above, in which contribution to IRAs of any type is ineligible? Does filing a PLR apply in this case at all? … Please excuse my lack of knowledge of PLRs…
Permalink Submitted by Jose Morales on Fri, 2015-06-26 23:20
The PLR would be separate from any asessment of tax, penalty or interest but from reading the actual PLR these individuals brought this situation to the attention of the IRS themselves and requested relief without any prompting by the IRS to assess tax/penalty/interest. http://www.irs.gov/pub/irs-wd/201511022.pdf
Permalink Submitted by Alan - IRA critic on Fri, 2015-06-26 22:41
The main benefit of paying for the PLR was likely the elimination of all the excise taxes and interest on these excess contributions, and also to keep the money in tax deferred accounts even though there would not have been a deduction for the recharacterized contributions. The use of the “super extended due date” flexibility for recharacterizations is quite rare, and the outcome is not always predictable. In this PLR, the IRS had not flagged even one of those excess contributions, but it is rare that a professional tax program would not flag an excess contribution for several years as well, although the excess amounts were finally exposed by a recent year tax program. Once this happens and taxpayer knows of many prior years of excess contributions, they have a difficult decision to make. Finally, if a taxpayer has no earned income at all such when foreign earned income is excluded and no taxable comp remains that would allow a late recharacterization, there is no point in pursuing a PLR for a later recharacterization. Same with any other situation where a TIRA contribution would also not be allowed, such as if a taxpayer was over 70 when the excess contributions were made, and which could not be recharacterized due to age.