RMD never taken

Senior citizen passes away in 2017 and never took the RMD for over 20 years. Taxpayer never received a letter from IRS concerning the required RMD. The taxpayer had some health & mental issues. Returns were filed by a another tax preparer that never questioned the taxpayer concerning the RMD. The tax preparer may not have known that an IRA account even existed.

The executor of the estate presented the following question to me today:
Do we file amended tax returns for prior years computing a penalty or wait for the IRS to react.

The potential problem can be after the IRA account is distributed to the beneficiaries of the estate the IRS could come along and assess a penalty for failure to take the RMD in prior years.

Involve an attorney. Ask attorneys advice. Attorney may want to amend only the open years.

Your situation is a little more complicated than the typical situation where one MRD is missed . It sounds like 20 or more years were missed and now the taxpayer is deceased .

One thing for sure I would not do is file amended returns and compute the penalty and pay it . Are you aware of the potential penalty amounts involved for 20 years ? This is called the excess accumulation penalty and the penalty could be applied for each year. if you voluntarily compute and pay it would be 50 % of the MRD amount that should have been taken each year .No you don't want to go this route !

There is a ton of information on this website that you should consider reviewing including the waiver process that you would go thru when completing form 5329 .

Has the 2017 personal tax return tax return for the decedent been completed and processed ? If not you should consider completing form 5329 and seeking the penalty waiver for all years . If the 2017 return has been filed then you should consider amending it by completing form 5329 and seeking waiver of all the penalties .

IRS is normally very lenient about this penalty for seniors .You are going to have to support your position with a letter explaining the circumstances . If there is a medical issue that would be great .If the beneficiaries agree to take a 2018 distribution up to the amount that should have been taken this would support your position. Crafting of the letter to waive the penalty is going to be important . I have gotten penalty waivers for 10 or 11 years but never had a case with 20 years so good luck .

Again get yourself educated by using the search button on this topic

In estates I have handled as an attorney I really never knew if the deceased took their MRD. On the final return we just addressed that year. As my clients generally did not have huge IRA balances the IRA's were terminated and each beneficiary took their share in one year and paid taxes on that amount. I am surprised that the IRS computers do not know the MRD for every taxpayer over the age of 70.5. I assume the IRS gets reports of the prior year end balances. I have long advocated getting rid of MRD requirements and limiting any "stretch" to surviving spouses. The tax revenue probably would be greater under that scenario than the present law.

The potential problem can be after the IRA account is distributed to the beneficiaries of the estate

Who was the beneficiary of the IRA – the estate [either by designation or by default, because actual people were not designated] or various persons [by designation]?

Jake stated :
"I am surprised that the IRS computers do not know the MRD for every taxpayer over the age of 70 1/2 "

I am not surprised as there are just too many variables involved in the calculation of the annual MRD amount :
** Many taxpayers have multiple IRA accounts at various institutions. Although IRS obtains a copy of the 5498 showing the
year end balance they would have to combine all accounts and then make the computation. They are just not set up for
that.
** There are at least 3 separate tables established for the withdrawal rate and IRS doesn't have access to that information
** Low priority by IRS to review and audit as announced regularly by Nina Olsen in report to Congress. I think that is why IRS give such leniency on waiving the penalty. I have probably prepared 35-40 waivers over the years and never been denied . It's pretty much an automatic .

The potential problem can be after the IRA account is distributed to the beneficiaries of the estate

Who was the beneficiary of the IRA – the estate [either by designation or by default, because actual people were not designated] or various persons [by designation]?

Sometimes it is best not to have any designated beneficiaries. The IRA balance is then estate income that can be offset by expenses of administration. That can sometimes be a beneficial estate planning tactic. This is especially true now that the misc. deduction by heirs of excess expenses on termination seems to be history.

I have probably prepared 35-40 waivers over the years and never been denied . .

I'm not surprised there are so many tax law violators (cheats, a.k.a. illegals). Somehow for their entire working life they never once neglected to defer taxes on the income, but suddenly when they get older they completely "forget" their side of the bargain, which is to pay tax on the retirement income. It's not by accident.

The IRA balance is then estate income that can be offset by expenses of administration.

Or, the mortgage interest deduction for a reverse mortgage of the decedent.

Taxpayer would have to > 90, and never needed the money these past 20 years. Impressive - or maybe was just a small IRA anyway.

For the 35-40 waivers obtained over the years I would not categorize a single one a cheater. Most of these returns were prepared thru the AARP TAX AIDE program . I would categorize these taxpayers as naive , many living in isolation ,and many, many ,with medical related issues including dementia and Alzheimer's.

We all know how difficult it is too have penalties waived . Ask yourself why it's so easy too have this penalty waived . IRS is extremely reluctant to waive penalties for tax law violators cheats (AKA illegals ) . We don't know the circumstances on this senior who has not taken MRD's for 20 years so I prefer to give him /her the benefit of doubt until the facts are known .

Most of these returns were prepared thru the AARP TAX AIDE program . I would categorize these taxpayers as naive, many living in isolation ,and many, many ,with medical related issues including dementia and Alzheimer's..

You have no idea whether the taxpayer completely and honestly answered all questions from Tax Aide/VITA. Are you blaming the prior preparer? That's what it appears you are saying. How is it that you were able to so easily find these missing RMDs when they finally came to you?

Just because someone is naive or living in isolation is not reasonable cause for violating the law is it? That is what it appears you are saying, just want to be sure.

Or, if they were truly incapacitated according to your amateur medical diagnosis, was it really right for you to be working directly with them in the first place? If the taxpayer is 70 years old and already incapacitated, they should have someone appointed by a court to handle their affairs. Funny isn't it how often their "dementia" only extends as far as their taxes, not the rest of the lives, eh?

It's odd, isn't it, how the dementia seems laser-focused on Line 15b of Form 1040, unless you found that their entire returns were riddled throughout with dementia-caused errors. Did you?

And do you really think many 70-year olds would appreciate being characterized as "naive", after all their long life of experience?

35-40 waivers obtained over the years I would not categorize a single one a cheater

It doesn't sound like you even investigated. You immediately gave them a "free pass" simply because they were old.

I support Lucyko's position - she is doing God's work - helping Seniors whom we all owe a debt of gratitude for fighting the Wars that kept America free. I would never disparage Seniors for getting a "free pass" they have earned it.
What say you Lucyko?

Got a 80 year old client/neighbor that is in early to mid stages of dementia (my barbershop medical opinion). Just lost her husband that did all of the paper work and taxes. She came to me in late January with account statements asking for help to file her taxes. She did have a couple of 1099s already. I told her that we should meet sometime after Jan. 31st as she should have received most if not all off her tax documents by then. She then came to me on the 31st with some other folder so I went to her house to help her. No tax documents could be found. My mistake was not taking what little she had but it would not have mattered anyway. I know I can't trust her with the tax documents even if we request copies which would be too cumbersome at this point. My plan is to request the information from the IRS and file a return that way. Need to research if the IRS will allow me to obtain that information with a POA. Haven't requested something like that in many moons and I've heard there's been some changes; so, will cross my fingers.

In the midst of looking through her documents, came across her and her husband's traditional IRA statements. Being that both were in cash and that the current balance is very close to a 2017 statement balance, my assumption is that no RMD has been taken for either.

Going to need that "free pass" that lucyko was able to get for her clients...which isn't free. My search for remedies basically says to file a Form 5329 with the tax return, not pay the penalty, and ask for a waiver. Looking at my software input, I can E-file the return with the waiver via a schedule.

My neighborhood has many retirees that are now finding me. Much easier for them as they don't want to drive but also their preparers are retiring too. Definitely will spend way more time on these clients than normal and will not be able to bill for all of my time. I know some would disagree but I can't do it on my part.

Even if my client didn't have a "medical" issue, I would still proceed to request a waiver. Isn't that what they are paying us for? I find that my older clients are intelligent but do get confused at times; so, I am willing fight for my clients even if their only excuse is being "old".

Here is my opinion, FWIW. Get the POA for years 2017-2018 at least. (You can go into the future 3 years - which sounds like a good idea if you are going to be her tax person for a while.) File that with the IRS so you can get the following:
1) Tax transcript for 2017. I am guessing that she probably can't find her copy.
2) Wage & Income transcript for 2017. This will tell you all the 1099's, etc. that were filed under her SSN the prior year so you have an idea what to be looking for in the future.

Side Note: How long ago did her husband die? Was 2017 a joint return? Getting the Wage & Income statement for a deceased person will have difficulties. And it is likely that prior years had a lot of the income in HIS name/SSN. The tax transcript of a joint return is the same no matter which SSN you look under, but the Wage & Income transcript is specific to the one SSN.

3) Wage & Income transcript for 2018. The difficulty here is that the IRS database may not be populated yet. I typically wait until the summer (after extending in April) in order to wait for the IRS database to be complete.

I just was on the phone with PPS this morning (only had to wait on hold for 2 minutes -- couldn't believe it!!) Anyway, they are still faxing info to POA so I got it immediately. (That was initially supposed to stop early Feb, I think, but that date was pushed back.) Yes, the info is truncated, but a lot of times you can figure it out if you know where they do business.

I have handled Form 5329 several times in the way you describe - don't pay the penalty and ask for the waiver. Usually, I wait until I can truthfully say that "taxpayer has now taken the missed RMD" and will comply in the future. I haven't had the waiver denied. You may need to do some figuring about just how many RMDs she missed. Maybe only 2017? That would be lucky.

See if you can help her do paperwork so that her RMD is distributed AUTOMATICALLY by the financial institution. I would pick a date for the RMD to be made early 4th quarter to give wiggle room for hiccups before year-end.

Yes she will require additional handholding. It sounds like you don't mind being helpful. Hopefully we will all be that age someday and karma will pay you back for your good deeds today.

Clients pay us in part to get them out of penalties, which we do our best to accomplish if we can without lying. The IRA distribution rules are complicated. If laypersons understood all of the tax rules, they would not need us!

Joan, crazy enough we found 2017 tax returns and appears that the RMD were taken for both. Husband did pass in 2017.

Just got a signed POA and will call PPS and fax over POA assuming I can get in. Sounds like you got lucky. I'll ask for the 2018 Wage and Income Transcript even though there's potentially some missing pieces. I think the bulk should be there but will compare to 2017's tax returns and see. I'm almost certain that there was no RMD as the IRAs are all in cash. The balance didn't change hardly at all from a 2017 (forgot the month) statement vs. a 2019 statement.

Called the financial planner and he hasn't called me back. After repeated attempts, I'll support client taking all of money out as she doesn't want to deal with anyone and want to have it all at one place. Initially I did not support that but sometimes peace of mind trumps everything else. This way she doesn't have to worry about RMDs and can just access cash all at one place, her bank. It is a relatively small amount for her; so, she's willing to pay the taxes and live a simple life. She knows she's giving up potential gains (so she says) but she really doesn't understand investments and doesn't want to think about it. She did mention that it is "too bad for my son but I want simple".

I know in my penalty waiver request, I am not lying; so, will have no problems with that. Maybe she's not diagnosed yet but I can tell, she can't really comprehend everything or maybe she can but forgets. The hard part is waiting till she takes out the IRAs as it will be a "battle" to get it done during my busy time. I don't know if I can devote that kind of time as my backlog is already almost two weeks this early in tax season. She wants the tax returns filed already; so, I may end up filing with waiver and stating that she is in the process of taking out missed RMD and or entire IRA balance. If she ends up not taking it out, I'll cross that bridge later. But definitely after tax season I'll follow up. I'll try to help her before but that will be a struggle.

Why not roll the IRA into one at her bank? Then she can just transfer funds easily and have it in cash.

IRA at her bank might be a good idea. You can have a savings account as an IRA (even though it doesn't earn squat, may be what this client would prefer.) Just don't let her FORGET to take her RMD in the future. Don't know if bank will offer the service of scheduling that RMD just for a savings acct IRA. However, maybe they will do a transfer type pmt where the RMD just goes into her checking account once a year. Doesn't hurt to ask!