Excess Accumulation in IRA problem
I have a client that may have not been taking the correct amount of the RMD from her IRA for several years. We found this out when I calculated the amount for her for year 2021 and saw that my number was considerably higher than her amount in year 2019 (they skipped the RMD in 2020 and her health is now failing). She had been making the calculations herself which I find to be odd. She said she thought she only needed to take a small percentage each year rather than using the divisor from the table. It seems to me that the custodian had some obligation to inform her of the proper amount each year. I informed her of the excess accumulation excise tax issue. She does not think that this will be discovered as she has been doing things this way for years. There is a form 5498 that goes to the IRS each year with the IRA value and the RMD box checked. My job is to inform her of the problem. One step toward a correction of the problem is to take the distributions which have been missed. I think we can also file prior form 5329 and request waiver of the penalty. This can only be done if she is willing to catch up on her distributions. Do you have any other suggestions. Have you seen situations where the IRS has caught this issue and issued assessments. This is not reason to ignore the issue of course.
Thank you
Joy S
Permalink Submitted by Alan - IRA critic on Wed, 2021-06-23 23:35
IRS RMD enforcement is very spotty and almost every year they indicate that improvement is a top priority. In addition, if a taxpayer discovers a shorfall, makes it up, and files a correctly completed 5329 to request the penalty waiver, the IRS almost always grants it. But if the IRS catches the shortfall first, they may not accept a waiver request. Of course, IRS leniency may well be explained by the excessive amount of the penalty (50% of shortfall). If her health is failing, that along with no contact from the IRS in prior years, might explain why she is not too concerned.
Custodians cannot require the RMD for their IRA to be completed because they have no idea on how many other IRA accounts a client might have or how much was withdrawn from the other accounts. The RMD aggregation rules allow clients to complete their RMD in any combination of accounts. A custodian must report the prior year end balance, and indicate that an RMD is required, and many will calculate the RMD for their particular account only, but they cannot distribute that amount without client’s permission.
In short, she is taking a chance but given her history and probably her age, she has a good chance of avoiding the worst unless the IRS gets their act together. Right now they need more staffing and much better systems to accomplish that.