Missed IRD deduction
Just having finished [u]The Retirement Savings Time Bomb[/u] by Ed Slott, I learned of the IRD deduction. My two brothers, sister and I inherited a large IRA from my father who passed away in 2003. One brother withdrew the entire IRA amount, and I took out a fair amount (greater than required by my father’s RMD that year). Both of us paid taxes. Neither the attorney who preapred the estate return or our accountants (3 different ones) notified us of the IRD deduction available. Of course, they each blame the other. We have amended our 2004 – 2006 returns, but does anyone have knowledge as to whether we can recover the missed 2003 IRD deduction by suing the attorney / accountants involved, or by any other means? We live in CT, where the statute of limitations is 2 years from when the error should have reasonably been discovered, or 3 years from the ‘injury.’ I’m wondering if the last date of the ‘injury’ might be the last day our attorney / accountant could have informed us in time to re-file the ’03 returns… Thanks, all
Permalink Submitted by Al Fry on Tue, 2008-02-19 22:58
I would think it is still recoverable. Not by your brother, of course. I’m not sure there is a time limit on claiming the deduction, and I’m not sure it has to be exactly pro-rata.
Permalink Submitted by Bruce Steiner on Tue, 2008-02-19 23:17
You might ask (or have your new lawyer ask) a lawyer in Connecticut who handles these types of cases. The statute of limitations for this varies from state to state.
Permalink Submitted by Al Fry on Sat, 2008-02-23 13:41
I just came back from giving CE seminars to FAs in CT, and it seemed like most did NOT have a firm grasp on the IRD deduction. I think there was only one attorney and one CPA in the group, however, and they did understand it. My main weakness is how it it taken pro-rata. I defer to the tax advisors for that, as Bruce points out. Al
Permalink Submitted by Bruce Steiner on Sun, 2008-02-24 16:03
Al raises an interesting point, which the following example illustrates. Suppose the IRA is $1 million, and the Federal estate tax attributable to it is $400,000. If the beneficiary collected the entire IRA all at once, he/she would have a $400,000 deduction. If the beneficiary collected $100,000 a year for 20 years (including the income and growth within the IRA), he/she would still only have a $400,000 deduction. I think Al is asking whether, instead of deducting 40% of the first $1 million collected, if it’s too late to claim the deduction for the first year, whether it’s possible to deduct 40% of the first $1 million collected beginning with the amounts collected in the second year.
I haven’t researched this question, but that’s something the original poster might want to discuss with his new lawyer before deciding how to proceed. If this is possible, it would subtsantially mitigate the loss. There would still be some loss, since the value of the deduction in some later year of the amount that might have been deducted in 2003 is substantially less than it would have been, due to the time value of the money.