FACTS. Taxpayer’s calculated MRD amount from Traditional IRA for 2022 was $50. Planned distribution was designated to be $35 to taxpayer’s bank account, with $10 of federal withholding and $5 of state withholding.

Actual 2022 MRD made on 20 Dec 2022 was $45. Taxpayer’s bank account received $35; federal tax withheld was $10. In error $5 was transferred to Taxpayer’s Traditional IRA (money market account) resulting in an excess accumulation.

On discovering Administrator’s error on 18 Jan 2023, taxpayer immediately contacted Administrator and requested $5 to be distributed immediately to the state (as withholding). That distribution occurred that day.

Administrator would not issue a ‘corrected’ Form 1099-R. Therefore, 1099-R, line 1, Gross distribution is $45, and Line 4, Federal income tax withheld is $10.

Taxpayer will request a waiver of the excess accumulation penalty (Form 5329) for reasonable cause: Administrator dropped the ball (error) and Taxpayer immediately took reasonable steps to remedy the shortfall. I am confident that the waiver will be granted.

Taxpayer has basis in the Traditional IRA which makes a portion of the distribution nontaxable.

QUESTION.
Assume the waiver is granted. Is the waiver solely for purposes of penalty relief? Or, does it allow Taxpayer to treat the 2023 distribution amount “as if” it occurred in 2022? Are there any special rules for dealing with the $5 excess accumulation distribution other than simply including it in 2023? If there are no special rules, then Taxpayer will deal with the IRA distribution on a cash basis and follow the Form 1099-R reported values.

Note: There are several knock-on effects from cash basis treatment, but I will not list them here assuming ‘cash basis’ treatment is the rule. If it is not the rule, and there are special provisions for dealing with this situation, then I will come back with other questions.

Thank you for reading this post and for any thoughtful comments. All are very much appreciated.

Sincerely,