Form 5329: Additional Taxes on Qualified Plans and Other Tax-Favored Accounts

Friday, August 05, 2011

By Beverly DeVeny, IRA Technical Expert
Follow Me on Twitter: @BevIRAEdSlott

What is Form 5329? Its title is “Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts.” You should file the form whenever you miss a required distribution, take a distribution before age 59 ½ when one of the penalty exceptions does not apply, and when you make excess contributions. Those are most of the reasons to file the form. The form calculates any additional taxes owed (what are often called penalties) for certain IRA transactions.

For example, you may not have taken all of your RMD (Required Minimum Distribution) last year – it does not matter if it was your error or the IRA custodian’s error. You should take the missed RMD as soon as possible and file Form 5329 with your tax return for the year of the missed distribution.

In a couple of recent court cases, IRS has taken the position that if the Form is not filed to report the additional tax, then the statute of limitations does not start on the transaction that created the additional tax.

For example, an advisor recommended that through a series of transactions, property or a business you own could end up in a Roth IRA. IRS does an audit and finds that you could not do this and have exceeded the Roth contribution limit of $5,000 for the year. You now have an excess contribution which should have been reported on Form 5329 for the year of the contribution and an additional tax of 6% per year should have been reported on Form 5329 and paid on the amount of the excess contribution.

Since the Form was never filed, the 6% can be assessed at any time. But wait there’s more. There is an addition to tax of 5% per month (capped at 25%) that applies whenever a return is not filed. And IRS looks at this form as a return.

So be sure to file Form 5329 whenever you miss a distribution, take an early distribution subject to the 10% additional tax, or make an excess contribution. Not filing the form could only make things much, much worse.

 

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