Advanced Underwriting Consultants

Question of the Day – May 28

Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax questions posed by producers.  Here’s the question of the day.

Question:  My client is 73, and she missed taking RMDs from her IRA for 2011 and 2012.  We just discovered the mistake.  What do we need to do with regard to past tax returns?

Answer:  If the client turned 70 ½ in calendar year 2010, she had until April 1, 2011 to take her RMD.  Her second RMD would have been due by December 31 of 2011, and the third one was due on or before December 31, 2012.

If the client fails to take the RMD by the deadline, the IRS imposes a special penalty tax of 50% on the amount that should have been distributed.  The penalty tax may be waived if

  • the taxpayer convinces the IRS that the failure to take the RMD was due to reasonable error, and
  • that reasonable steps are being taken to fix the problem.

A taxpayer applying for relief from the penalty tax must file IRS Form 5329 for the year in question and attach a letter of explanation. The instructions say that if the return is already filed, then Form 5329 can be filed separately for each year if it won’t otherwise change taxable income.

That means that for calendar year 2011, the client can file a Form 5329 by itself.

For calendar year 2012, if the client has not yet filed a final income tax return for the year, Form 5329 would be filed with the return.  If the return has already been filed for 2012, Form 5329 would be filed by itself.

To maximize her chances that the IRS will waive the penalty tax, the taxpayer will want to take the RMDs she should have taken in 2011 and 2012 before filing the Form 5329s.  That means the IRA distribution will show up as taxable on the calendar year 2013 return.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.