- Option 1 might work, but only if the IRS never notices the omitted RMDs. When a 5329 is filed it starts a 3 year SOL for that RMD. If you never file it, there is no SOL and the omission is never really put to bed and the uncertainty continues. If you distribute the cumulative RMDs now without the 5329, the IRS will only consider the distribution to satisfy the current year RMD and the rest is just a discretionary additional distribution. Conversely, if you distribute the same amount and file a 5329 explaining that you missed the RMD and have now made it up, the IRS normally will accept that and waive the penalty. Not filing the 5329 after taking the distribution does not show much of a good faith indication because it does not report to the IRS that any RMDs were missed. Option 2 however follows the procedure recommended in the 5329 Inst.
- There are no guidances that limit when a 5329 can be filed. It could be filed if the IRS initiates the contact, but self reporting looks better to the IRS than when the 5329 is filed only after the IRS makes contact.
- There is no specific guidance on whether to adjust the IRA value for missed RMDs, however the 2002 IRS Regs did make a change for an IRA owner’s first year RMD. Formerly, the IRS allowed the first year end balance to be adjusted, but the 2002 change stated that there was to be no adjustment to the year end balance if an RMD was deferred to year 2. The IRA owner must use the actual year end balance without adjustment. This thinking would likely translate to inherited IRA RMDs as well. After all, the IRS is getting their tax money much later when RMDs are missed, so why would they allow an amount that remained in the IRA to be ignored when figuring the next RMD?
So, what I’m wondering is, generally the statute of limitations is 3 years. Is there a statute of limitations on RMDs? Meaning, wouldn’t I only need to take out 2017-2015 RMDs instead of going back to 2010 because of statute of limitations?Also, does the 50% penalty on missed RMDs apply to the current year that you would take it out, so would it apply to 2017 as well or just to years 2010-2016?One additional question: Both of these 2 IRA accounts I were put into my name and funded in my name as an IRA BDA in 2010. I was the original beneficiary, except for 1 account which had my grandma who passed away as the beneficiary, then it was transferred to me.So because I did not have access to the 2009 year end values of either account and the accounts were not in my name until later in 2010, do I need to do the 2010 RMD?
YB: As Alan said above, the statute of limitations begins to run only after you file form 5329. If you never file form 5329 for any tax year, your tax liability will last forever, for life, and will be subject to possible interest and penalty if the IRS eventually discovers the liability. They are much more leniant when you self-report with a plausible reason. Self-reporting is the method specified in the instructions for form 5329. You shouldn’t chance it when facing a 50% penalty.
Does the 50% penalty on missed RMDs apply to the current year that you would take it out, so would it apply to 2017 as well or just to years 2010-2016?Is there a law or PLR or something about the statute of limitations on when the penalty can be assessed for RMDs?
The SOL is only activated by filing a 5329 for any RMD year. The 5329 is for either paying the 50% tax or requesting a waiver due to “reasonable cause” for missing the RMD. No 5329, then no SOL applies. The penalty is due by the following 4/15, so if the IRS does not waive the penalty then late interest would also start accruing on 4/15. That said, the IRS oversight of missed RMDs is very spotty, so there is minimal consistency to IRS actions. While the IRS states in the Regs that a missed RMD is added to the next year’s RMD in determining how much of any distribution is eligible for rollover, the IRS appears to be locked into a single year by year enforcement regimen rather than cumulatively assessing the entire RMD history. The IRS cannot bill the 50% penalty until they are aware of a shortfall. You first make up all the delinquent RMDs and then request the 5329 waivers and wait for the results which are usually positive when you self report the omissions. Therefore, if you do nothing there is no SOL running and the IRS could in theory go back to year 1 to assess the penalty and interest. But they almost never go back very far, yet they know there is all this tax leakage and at some point they are probably going to take action. What is not clear is if you just took out the 2017 RMD only, the IRS would probably apply that to 2017, not to 2010 which was the oldest missing RMD year. Once you depart from the 5329 filings for each year, the end result is highly unpredictable.
Is there a law or PLR or link you could please send me about the 5329 and how it applies to RMD statute of limitations?Doesn’t the statute of limitations also apply whenever you file a tax return? So if I just took out the RMDS in a tax year, would they be covered under the SOL from the date when I filed my taxes for that tax year?I think I understand about the RMDs for the missed years 2016-2010. However, would the RMD for 2017 only (non including any of the missed RMDs I would be taking out for back years) have the possibility to be penalized by the 50% tax, even though the 2017 RMD is current and not missed because it is in the current tax year?
See Robert K. and Joan L. Paschall v. Commissioner which holds that Form 5329 is a separate tax return and the statute of limitations clock does not start until a Form 5329 is filed: http://www.ustaxcourt.gov/InOpHistoric/paschall.TC.WPD.pdf
I have never heard of the IRS applying a current year RMD to prior year omitted RMDs. I think this is what you are asking. IRS Reg 1.402(c)(2) QA 7 (last portion) appears to first apply distributions in a calendar year to that year’s RMD instead of applying the distribution to some prior year still delinquent RMDs. In other words, if the latter situation occurred the taxpayer would incur a current year excess accumulation penalty in addition to the prior year penalties that may not have been waived by filing Form 5329. As indicated in the Paschall case, the SOL for RMDs, excess contribution excise taxes etc is triggered only by a proper 5329, not by a 1040 filing. I think there was also a case where a 5329 left blank did not trigger the SOL, actual entries to the applicable section of the form were required. In summary, be sure to take a distribution of the 2017 RMD, and also a consolidated distribution of prior year delinquent RMDs. You can then break out the make up distribution by year and include it with your reasonable cause explanation. I don’t think there is much chance of the waiver request being refused, but you might not be notified promptly, if at all. No news is good news, but it keeps you on ice longer.
The following is copied from a Natalie Choate article:
When an RMD is not taken in the Distribution Year to which it is attributable, it is added to and considered part of the RMD for the next Distribution Year for purposes of determining whether distributions in the subsequent year are eligible for rollover. Reg. § 1.402(c)-2, A-7(a) (last sentence). (RMDs are not “eligible rollover distributions”; see È1.1.) However, it does not appear that the missed RMD is subject to the 50 percent extra tax in more than one year; see IRS Form 5329 (2011), lines 50–51, and Instructions (pp. 6-7). Presumably, despite the “carryover” rule, if an RMD was missed in only one year, Form 5329 needs to be filed only for that year, not for all subsequent years until it is taken.
Would it be better to take a consolidated distribution for all missed years from 2010-2017 or would I be able to ask the financial insitution to stagger out each distribution and make each distribution pertain to each year? So they would take out the rmd for 2010 separately, the rmd for 2011 separately, and so on, up to 2017 (accomplishing all of this before Dec. 31 of this year of course).My worry is that if I have it all as a lump sum they could just say that I only had an excess contribution for 2017 and did not try to take out the back distributions for the prior years.
You could do that, but it really is not necessary. If you want to do it, all you need to do is take the distributions one day apart so they show up as separate amounts on your transactions statement that you could copy and send with your 5329 forms.
So still a tiny bit confused on form 5329. So from what you have stated, the statute of limitations will apply for the missed rmd years only if I file form 5329. Is this correct? And that the form 5329 is considered a tax filing separate from doing regular tax filing.It also seems that the 50% missed rmd penalty would apply to all back years 2010-2016 and also 2017. Is this correct? The last thing, is if I will need to file one form 5320 for each year of the missed rmds, or if filing a single form 5329 for 2017 and stating all of the missed rmds that I took out as separate payments in 2017 will suffice?
25.6.1.9.4.3 Forms Reporting More Than One Item of Tax
- 6.b. If the Form 5329 is not attached, the period of limitations on assessment for the tax imposed by IRC Section 72 (q) and (t) begins with the filing of the Form 1040. The period of limitations on assessment for the miscellaneous excise taxes does not begin with the filing of the Form 1040. The other miscellaneous excise taxes carry their own period of assessment based on when the Form 5329 is received for assessment.
You got your money’s worth from the lawyers you consulted. You can either hire a lawyer to prepare the requests to waive the penalty, or you can do it yourself. If you do it yourself, do what Alan suggested and give the IRS a good reason or two.
OP – You asked for comments, got comments, and now you should either accept or reject them and move on.
Permalink Submitted by Alan - IRA critic on Mon, 2017-10-09 16:21
Permalink Submitted by A S on Mon, 2017-10-09 20:40
Thank you so much for your response!*Yes, I do agree that taking out each of the missed RMDs according to my life expectancy, so taking 2017-2010 by the end of the calendar year in 2017, not in one lump sum but having them differentiated into seperate payments for separate years, will be best.*Would I tell the financial company to take a corrected RMD out for each year and need to do all the calculations myself?*Is there a law or ruling about if the year end account balances for RMDs that should have been taken out but were not can be adjusted or not per taking the rmd calculation for the prior year and subtracting it from the next year?*The main question is whether to file the form 5329.*Option 1 I was basically told by one tax attorney and one cpa whom I had a free consulation with that if I filed form 5329 I would essentially alert to something and would then be targeted to pay the penalty. But if I did not file the form 5329 then I could just wait until if and only if I receive a letter in the mail saying I owe something, then file it.*Can the form 5329 be filed once a letter is written/penalty assessed to dispute it? Is this good advice?