RMD tax penalty for deceased
We have a spouse of a former client who has approached us with a situation that I honestly have never encountered. She says she received a letter, addressed to her husband, regarding a tax penalty owed for not taking an RMD in 2008. Her husband actually passed away last year, and she simply sent the IRS the money they say he owed without question and has now come in to verify if her husband really did not take his RMD in 2008. He rolled over his IRA to us in 2008, including the RMD amount, so it’s actually an excess contribution that occured which was never corrected.
We are having her bring in the letter so we can verify exactly what the IRS is disputing, but even if the client did in fact not take an RMD in 2008, or never corrected an excess contribution, can the IRS still assess a penalty that the wife must pay now that the husband has passed away? She took the funds as her own last September so there is no longer and IRA belonging to the husband to correct an excess contribution from.
Permalink Submitted by mk foss on Fri, 2011-02-11 01:13
If they filed a joint return for 2008 and her late hsuband owed the 50% penalty for failure to take the RMD, the spouse is liable for it.
The IRS has been very good about waiving the 50% penalty but the first requirement is that the missed RMD is withdrawn before the waiver is requested. If she took out the RMD now ( a good idea because of the excess contribution); IRS might waive the penalty. She could file a refund request to get the penalty back. This involves filing Form 843 with the IRS – Form 1040-X doesn’t work because you are looking for the refund of a penalty and not an income tax. She would attach an explanation to the Form 843 – saying that her husband had made the error shortly before he passed away and she was not informed of the short fall until she consulted experts after paying the tax. She’d have to explain that the missed RMD had been taken before the waiver request/refund claim was filed.
Then she’d need to deal with the excess contribution penalties for 12/31/08; 12/31/09; and 12/31/10.
Let us know what the paperwork reveals. The only time that I’ve seen IRS assess this penalty is when the taxpayer reports the error. I’ve had two occasions where the IRS assessed the penalty and withdrew the request once they read the waiver request that had been attached to Form 5329 on the return filed.
Permalink Submitted by Alan Spross on Fri, 2011-02-11 02:46
I think this thing could unwind in a couple different ways.
First, if the IRA was rolled over indirectly to your firm in 2008, the RMD was deemed taken. If the IRA was moved by direct transfer then the RMD was NOT deemed taken. Was there a 1099R for that? The IRS position should be that if the rollover was indirect the RMD was taken and only the tax on the RMD is owed for 2008. Conversely, if the IRA was moved by T to T transfer, then the RMD was NOT taken and the excess accumulation penalty would be assessed. Mary Kay covered the solution if the latter scenario applies.
So, which was it, and did the IRS ask for the tax due on the RMD distribution plus interest OR ask for the 50% penalty due for the failed 2008 RMD plus interest? They shouldn’t be asking for both.
Permalink Submitted by Jose Morales on Fri, 2011-02-11 17:17
I’m very interested in seeing the notice she received from the IRS. This was an IRA to IRA rollover, which makes me believe maybe there is a misunderstanding about what the IRS is saying a penalty is owed for. If this was an excess contribution due to the rollover of the RMD amount at least the 6% penalty will be a very small dollar amount considering the dollar value of the IRA itself is quite low.