When filing a Form 5329 to request a penalty waiver, should the penalty payment be made as part of the 5329 filing or as part of the 1040 extension filing in April ?

Polythene-Pam · ‎June 1, 2019

I missed an RMD from my IRA in 2018. I am filing a Form 5329 to request a waiver of the penalty (50% of the missed RMD). My plan is to file the 5329 prior to filing an extension in April 2019, anticipating that the IRS will make a decision prior to the final 1040 filing. I also plan on paying the penalty upfront. My question is whether the payment should be made as part of the 5329 filing or as part of the extension filing in April.

macuser_22 · ‎June 1, 2019

Do *NOT* pay any penalty. The IRS almost NEVER denies the waiver but recovering the paid penalty is not easy. Any tax due on the RMD is paid in the year that the RMD is actually taken, not with the 5329.

First, if you have not taken the missed RMD, take it ASAP so you can tell the IRS in the explanation statement that it has been taken.

You will need to file a 5329 form and request a waiver of the penalty. (The waiver would only be denied if there is no reasonable explanation and the missed RMD was not taken at all.)

Unfortunately this can only be done using the "forms" mode that is only available with the desktop software if you do not have a 1099-R to file.

If you do have a 2018 1099-R to report then the RMD question in the interview will go to the form 5329 waiver interview if you say that the 2018 RMD was not taken.

If you are using the CD/download version:

Enter the forms mode and click on open form. Type in 5329. Choose 5329-T for the taxpayer (first person listed on your tax return), or 5329-S (for spouse - 2nd person on tax return).

Scroll down to Part IX line 52 and enter the RMD amount that should have been taken. On line 53 enter the amount of the RMD that was actually taken (probably zero if it was missed).

Then in the box right under line 53 "Waver of Tax Smart Worksheet" enter the same amount as line 52 (the RMD amount).   Then click the "Explanation" button and enter the reason for missing the RMD and your statement requesting a waver.

You will not pay any penalty now until the IRS determines if it will grant the waver, then they will inform you if you owe the penalty.

OR - if using the Online version and have no 2018 1099-R to file, you will have to prepare the 5329 manually .

Download the 5329 form from the IRS website and fill it out the same as above. Print and mail your return with the 5329 form and explanation attached as described in the 5329 instructions.

The 2018 5329 must be attached to your printed and mailed 2018 tax return and cannot be e-filed.

[NOTE: You can only use this method if you are requesting a waver of the penalty and there is no taxable amount on the 5329 form line 55 that must be transferred to the 1040 form]

From 5329 instructions:
Quote:
"Waiver of tax.   The IRS can waive part or all of this tax if you can show that any shortfall in the amount of distributions was due to reasonable error and you are taking reasonable steps to remedy the shortfall. If you believe you qualify for this relief, attach a statement of explanation and file Form 5329 as follows.
1. Complete lines 52 and 53 as instructed.
2. Enter “RC” and the amount you want waived in parentheses on the dotted line next to line 54. Subtract this amount from the total shortfall you figured without regard to the waiver, and enter the result on line 54.
3. Complete line 55 as instructed. You must pay any tax due that is reported on line 55.
  The IRS will review the information you provide and decide whether to grant your request for a waiver. "

Download blank 2018 5329 form here:
Form: http://www.irs.gov/pub/irs-pdf/f5329.pdf
Instructions: http://www.irs.gov/pub/irs-pdf/i5329.pdf

**Disclaimer: This post is for discussion purposes only and is NOT tax advice. The author takes no responsibility for the accuracy of any information in this post.**

View solution in original post

DDollar · ‎June 1, 2019

I suggest you pay any tax that would be due on the RMD along with the 5329. I would not pay the penalty. Be sure to take the RMD, and send proof of the that along with the Form 5329.

leo6loisgmail · ‎March 5, 2020

I want to ask a waiver for the penalty. I have already ask min. distribution from bank and will receive in two days.

macuser_22 · ‎March 5, 2020

@leo6loisgmail wrote:

I want to ask a waiver for the penalty. I have already ask min. distribution from bank and will receive in two days.

See my post above how to do that.

**Disclaimer: This post is for discussion purposes only and is NOT tax advice. The author takes no responsibility for the accuracy of any information in this post.**

Kmalesh · ‎March 28, 2020

Thank you macuser_22 for all detail information. Reg 5329 , I am not able to see that form in my TurboTax Delux Software, if you can guide me where I can see it.

I am 40 year old and have deposited $5500 into my wife traditional IRA account in ~Dec 2019 for 2019 year contribution, but due to total gross salary exceeded its limit, I cannot take tax advantage on that deposit, so requested to withdraw [non-deductable / excess contribution]. Fidelity sent me excess contribution amount $5500 and earnings [ $11.05 ] along with a letter, and Fidelity will send my 1099-R form in Jan 2021. I think I have to file this withdrawal in 2019 tax filling, right ? Can I file TAX online using TurboTax or I have to file paper base due to form 5329? If online I can file, then where I can find this form in Turbo TAX delux SW, as not seeing it anywhere. Do I have to file any other form along with 5329 ?

Note: My wife is working part time and her employer doesn't cover "Retirement Plan at Work", so I created her traditional IRA account.

macuser_22 · ‎March 28, 2020

@Kmalesh wrote:

Thank you macuser_22 for all detail information. Reg 5329 , I am not able to see that form in my TurboTax Delux Software, if you can guide me where I can see it.

I am 40 year old and have deposited $5500 into my wife traditional IRA account in ~Dec 2019 for 2019 year contribution, but due to total gross salary exceeded its limit, I cannot take tax advantage on that deposit, so requested to withdraw [non-deductable / excess contribution]. Fidelity sent me excess contribution amount $5500 and earnings [ $11.05 ] along with a letter, and Fidelity will send my 1099-R form in Jan 2021. I think I have to file this withdrawal in 2019 tax filling, right ? Can I file TAX online using TurboTax or I have to file paper base due to form 5329? If online I can file, then where I can find this form in Turbo TAX delux SW, as not seeing it anywhere. Do I have to file any other form along with 5329 ?

Note: My wife is working part time and her employer doesn't cover "Retirement Plan at Work", so I created her traditional IRA account.

@Kmalesh This thread is about an entirely different situation - a missed RMD for someone over age 70 1/2.

A return of contributions is totally different. See below:

*IF* you requested a return of contributions due to an excess contribution and the excess was removed before the extended due date of the 2019 tax return and the earnings were also returned and you know that the IRA custodian will report this as a return of contribution and not as a normal distribution but as a return of contribution with a code "P" in box 7 - then:

You can just report it now and ignore the 1099-R when it comes .

You would enter the 1099-R with the total distribution in box 1 (the contribution plus the earnings),

The earnings in box 2a,

Enter code "P" in box 7 - don t worry that it will say "taxable in 2018 "

Check the IRA/SEP/SIMPLE box.

On the "Which year" screen say that this is a 2020 1099-R. - That makes it taxable in 2019 and not 2018

After the 1099-R summary screen press continue.

If you are over 59 1/2 then on the "Lets see if we can lower your tax bill" enter the box 2a amount in the "Another Reason" box to eliminate the 10% early withdrawal penalty on the earnings.

Enter the explanation for the excess contribution and that you are reporting a 2020 1099-R on your 2019 tax return to avoid having to amend in 2020.

The box 2a earnings will be taxable income reported on line 4b on the 1040 form and if under age 59 1/2 will also be subject to a 10% penalty on a 5329 form that will be reported on line 59 on the 1040 Schedule 4 form.

**Disclaimer: This post is for discussion purposes only and is NOT tax advice. The author takes no responsibility for the accuracy of any information in this post.**

fanfare · ‎March 28, 2020

@DDollar you definitely don't pay tax that might have been due.

Since the RMD was missed there is no income and no income tax.

The instructions say to submit half of the penalty you want waived, but I can find very few persons who agree that's what the instructions say, so, don't pay any penalty until the IRS bills you.

MrsJos_E_W · ‎April 18, 2020

@macuser_22 Let me see if I understood this correctly --

Due to old-aged forgetfulness I failed to take my RMD for 2019. As soon as I discovered the mistake (the other day as I was getting my documents together), I contacted the institution and arranged for the distribution at once. Now I want to apply for the IRS waiver of any tax and/or penalty as a consequence of my forgetfulness.

Using the Free File Program of TurboTax, can I complete my 2019 return EXCEPT for Form 5329 and print the return on paper; then manually print Form 5329 and fill it out by hand; then mail it together with my printed TurboTax return?

What about Schedule 2? Do I need to file it? Since I am requesting a waiver on the full amount of the missed RMD, resulting in zero (-0-) on line 54 of Form 5329, then 50% of line 54 is zero (-0-) and line 55 is also zero (0-) so is there anything to report on Form 1040-SR?

BY THE WAY -- I just noticed that the instructions for line 55 on Form 5329 say to report the amount on that line to line 6 of Form 1040-SR. But line 6 has to do with capital gain/loss reporting. The line for IRA distributions is line 4 (parts a and b). Is this an error on Form 5329 line 55?

Thank you for your help.

fanfare · ‎April 18, 2020

If you believe you qualify for this relief, attach a statement of explanation and file Form 5329.

Put your name and SSN on the statement.

You can get the form in fillable-PDF format, and fill it using Adobe Reader.

dmertz · ‎April 18, 2020

The instruction on line 55 of Form 5329 say to include the amount on line 6 of Schedule 2, not line 6 of Form 1040.

If there is no other need to include Schedule 2 in your tax return, you could probably omit Schedule 2, but for completeness you might consider downloading Schedule 2 from the IRS website, putting $0 on line 6, filling in the taxpayer name and SSN, and including it with your mailed tax return along with the Form 5329.

MrsJos_E_W · ‎April 18, 2020

@fanfareThank you for a very quick response! Unfortunately, you didn't address my questions. I feel fairly confident about the need for and how to file Form 5329. My questions have to do with --

-- confirmation of what is the process for filing Form 5329 in the Free File Program environment of TurboTax?

(I want to have my 2019 tax info available through TurboTax for when I file the 2020 return next year. I am reluctant to upgrade to the Deluxe version of TurboTax, especially if there is a way to file Form 5329 AND TurboTax Form 1040-SR together, manually.)

-- do I need to file Schedule 2 in conjunction with Form 5329?--> SOLVED by @dmertz

-- is there an error in the instructions of line 55 on Form 5329? --> SOLVED by @dmertz

Thanks again.

dmertz · ‎April 18, 2020

See the reply above that I made while you were typing. It answers both of your questions.

MrsJos_E_W · ‎April 18, 2020

@dmertzTHANK YOU!!!

(a pretty clear demonstration of how a 73-yr-old mind struggles with the details!)

MrsJos_E_W · ‎April 18, 2020

And thank you again!

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