I have a client who recently discovered he has NOT been taking enough out of his IRA. The under withdrawal dates back 8-9 years at about $4,000 per year. All total it is about $35,000 additional he should have taken out.

My first question is in regard to the closed tax years. If he were to pay the penalty(50%) would it apply to those closed years also? I know it gets reported on the Form 5329 so would I need to file amended returns for all those years or just report the entire undistributed amount on the 2007 Form 5329?

Next I would like your opinion on what we are considering. I have recommended taking the $35,000 distribution now to catch things up. Then send a letter to the IRS (now before the 2007 return is actually filed) telling then the situation and asking for forgiveness. I know the instructions say we are supposed to pay the penalty first and then ask them to return it, but I would prefer to not give the IRS money if I don’t have to.

Do we have enough “reasonable cause” by saying the client relied on the security company. They had 2 accounts with the same company, but were only being paid the RMD out of one of the accounts. I am also hoping for a fair amount of sympathy from the IRS since we are voluntarily taking the distribution to correct this problem.

Your opinion is much appreciated.