MRD Penalty

[Christian]

A client called today and stated he had failed to take the required MRD from his IRA account for 2021. I have not seen this before and am aware there is what ? a 50% penalty imposed for this. He is meeting with his broker to see what can be done but says they have indicated they will not waive the penalty. Does the brokerage access this and forward to the IRS ? No client I have ever had failed to take an MRD so this is new to me. If they assess the penalty what type of IRS form will they send him ? He is extended until October 15th so no worries there.  

[jklcpa]

Penalty is 50% of the shortfall of RMD not taken.

Correct the shortfall ASAP before the return is filed.

See the instructions for part IX of form 5329 "Exceptions to the Penalty and how to fill out lines 52-55 to request the waiver.  I've never had the penalty assessed for anyone that made the correction as soon as this was discovered and before the return was filed.

By filling in these lines per the instructions, the software will not assess or include the penalty with the return. 

[Christian]

After reviewing the applicable rules he may qualify for a waiver. Assuming he has a plausible reason is the Form 5329 included with the return showing the penalty but not paying it with the return ?

[Christian]

I will surely do that. What you advise is taking the full distribution before October 15th. I have not had time to read the 5329 but assume it is included with the explanation. He has received a letter from his broker and seems confused about what they can do about this. It looks to me that all they need to do is make the full distribution and he must handle the rest.

[jklcpa]

Yes, he must take the RMD for 2021 to correct the issue, and he must also make sure to take the RMD for this year too.

I'd suggest you keep copies of all documentation now while he has so that if IRS asks for it, you don't have a mad scramble to find it later on. For what it's worth, I've never had one of these questioned either.

I don't know why the broker should be confused. All they have to do is make the corrective distribution for 2021 now. They have nothing to do with the penalty at all.

[BulldogTom]

36 minutes ago, Christian said:

I will surely do that. What you advise is taking the full distribution before October 15th. I have not had time to read the 5329 but assume it is included with the explanation. He has received a letter from his broker and seems confused about what they can do about this. It looks to me that all they need to do is make the full distribution and he must handle the rest.

It is not for the broker to do anything with the penalty.   The taxpayer is supposed to assess on their personal tax return.  

The Taxpayer needs to direct the broker to calculate and distribute the 2021 RMD.   The taxpayer needs to direct the broker to calculate and distribute before the end of the year the 2022 RMD.   The broker needs to follow the taxpayer's instructions and then issue the 2022 1099R showing the total of both distributions.   Then the Taxpayer comes to the preparer, who requests the waiver on the 2021 return indicating that the corrective distribution was taken in 2022 and will be included in income on the 2022 return.

Tom
Longview, TX

[Christian]

For clarification. I take it BOTH the distribution for 2021 and 2022 are indicated as income in 2022 on a Form 1099-R ? Since his filing for 2021 will show the 2021 distribution for purposes of the penalty waiver it occurs to me this could pose a problem. If they issue a form which shows both the 2021 and 2022 distribution I can see where the IRS will understand what occurred. I am assuming he needs to attach his letter of explanation to the Form 5329 giving his reason for a waiver and stating he will pay tax on BOTH distributions in his 2022 income tax. He is a retired veteran who has some cognitive issues. I would think a simple note from a VA doctor would cover the waiver issue.

[Christian]

In speaking with him yesterday it was decided he would instruct his broker to distribute his 2021 distribution immediately and later his 2022. He was a little confused having gotten an IRS message in regard to his extension thinking this was from his broker. He will get a letter or note from his VA doctor which along with a brief letter from him will be attached to his Form 5329 on his 2021 return. This will likely get him the waiver. Oddly I mailed a number of extensions for clients all in a single envelope PRIOR to the April deadline only to have some getting rejection notices advising the extension was received too late. Thanks for those who advised me.

[JohnH]

On 7/24/2022 at 12:00 PM, Christian said:

In speaking with him yesterday it was decided he would instruct his broker to distribute his 2021 distribution immediately and later his 2022. He was a little confused having gotten an IRS message in regard to his extension thinking this was from his broker. He will get a letter or note from his VA doctor which along with a brief letter from him will be attached to his Form 5329 on his 2021 return. This will likely get him the waiver. Oddly I mailed a number of extensions for clients all in a single envelope PRIOR to the April deadline only to have some getting rejection notices advising the extension was received too late. Thanks for those who advised me.

Wouldn't your Certified Mail/Return Receipt number be helpful in replying to the rejection notices? 

[Christian]

Normally I efile them but this year made an exception. Fortunately for me most if not all of them get refunded.  

[Terry D EA]

On 7/24/2022 at 12:00 PM, Christian said:

In speaking with him yesterday it was decided he would instruct his broker to distribute his 2021 distribution immediately and later his 2022. He was a little confused having gotten an IRS message in regard to his extension thinking this was from his broker. He will get a letter or note from his VA doctor which along with a brief letter from him will be attached to his Form 5329 on his 2021 return. This will likely get him the waiver. Oddly I mailed a number of extensions for clients all in a single envelope PRIOR to the April deadline only to have some getting rejection notices advising the extension was received too late. Thanks for those who advised me.

AWLAYS use separate mailings. Putting multiple mailings in one envelope is opening the door for trouble. Individual mailings will have an individual tracking or certification proving post mark. Grouped together not so much. Good Luck

[Christian]

This was an unusual year. Rarely do I file any extensions and what few by efile. Things being what they are I may need to make some adjustments.