By Jeremy T. Rodriguez, JD
Mistakes happen, and when dealing with complicated rules like the U.S. tax code, they aren’t exactly uncommon. Thankfully, the IRS has numerous ways various mistakes can be corrected, and one of the most lenient processes is for missed required minimum distributions (“RMDs”). To say that the missed RMD penalty is stiff (i.e., 50% of the missed amount) is a gross understatement. If you don’t ask for relief in the right manner, the IRS can impose the penalty and interest on the missed amount. Therefore, knowing how to ask for relief for this type of mistake is more important than ever.
Missed RMDs can happen under a variety of circumstances, but the most common are misinformed non-spouse beneficiaries and IRA owners who simply misunderstand the rules and are poorly advised. Most non-spouse beneficiaries are unaware that the first RMD must be issued by December 31st of the year after the IRA owner dies. And sadly, while some are told this shortly after the IRA owner’s death, few custodians will follow-up to make sure the distribution was in fact made. Similarly, while many IRA owners are told to take their first RMD by April 1st of the year following the year they turn 70 ½, in most cases there’s no follow-up to ensure the distribution actually occurred. In either case, the correction process is the same.
The first step is to withdraw the missed RMD. In fact, the IRS will not even consider granting relief from the penalty until this is done. After this is done, you need to report the mistake to the IRS. You do not have to amend previous income tax filings (i.e., Form 1040 series). The income from the RMD is included on the return for the year of distribution, along with the current year’s RMD. Instead, the mistake is reported to the IRS on Form 5329.
You should file Form 5329 along with your annual return for the year the missed RMD was finally distributed. However, you can file it as a stand-alone return. When you complete the Form, follow these steps:
- On line 52, report the RMD that should have distributed.
- On line 53, report the amount that was distributed before the deadline.
- On the parentheses on line 54, write “RC” (for reasonable cause) and list the amount you want waived. If you are requesting a full waiver, you should enter “0” on line 54.
- On line 55, report the penalty that is due. Again, if you are requesting a full waiver, you should enter “0.”
- Attach a statement to the return explaining how the mistake occurred, what you did to remedy that mistake, and how you are making sure it doesn’t reoccur. This statement doesn’t have to be extremely long.
- Finally, do not pay the penalty! Instead, wait for the IRS to inform you whether the waiver request has been approved. If it’s denied, the IRS will send a notice requesting payment.
Lastly, the IRS guidance on the waiver states that it will be granted if reasonable circumstances exist. Unfortunately, there is no published guidance on what counts as reasonable circumstances and the IRS does not issue public opinions on approved waivers. However, if this is a first-time mistake (even one that covers multiple years) by someone that wasn’t trying to circumvent the tax rules, and the mistake is corrected soon after discovery, chances are good the IRS will grant the waiver. Either way, it can’t hurt to ask. The key is asking in the right manner.