Form 5329, Part 9 guidance needed for federal and state 2023 and impact on 2024 taxes

[cramanitax]

Hello.  I am completing Part 9, form 5329 on TT Desktop version but not sure if I completed the section correctly.  The missed RMD distribution for 2023 was $10K total and taken as lump sum in Feb 2024.  Here's how I completed the form:

1. Line 52: 10000
2. Line 53: 0
3. 53 A Waiver: 10000 + explanation 
4. Line 54: "See STMT", "RC", 10000 listed under the dotted line, and then in the calculation box, 0 (this is what I am not sure about)
5. Line 55: additional Tax Smart Worksheet--answered "NO" but not sure on this response as I looked at the instructions and still confused about the "Corrective window".  The full distribution for 2023 was taken on Feb 28, 2024 and federal and state inc taxes were withheld at that time too.
6. Line 55: Left blank (also not sure if I should leave blank?)

For California State Taxes, TT does not have related questions on the state return for a missed RMD.  I checked the Franchise Tax Board website and didn't find anything.  Does anyone know if there's an equivalent to form 5329 for California?  Does anything need to be reported?

Lastly, technically, for 2024 taxes, the 1099-R will likely reflect the 2023 + 2024 distributions and related taxes so is there anything else that needs to happen other than reporting it normally as an RMD?

Thank you!

[fanfare · Accepted solution]

If you are requesting a waiver of the additional tax, Line 54 must be zero,

in which case it doesn't matter if you are in the correction window or not..

[dmertz · Accepted solution]

The correction window is irrelevant if your are requesting a waiver of the entire penalty.  The answer to the question about the correction window only applies if the penalty is being assessed.

[cramanitax]

Thanks fanfare. There's two boxes associated with line 54, one is under the dotted line and the other is outside of it which is why it's confusing.  So for the box under the dotted line, I entered 10000 and for the other line 54 box, the value is 0.  See inserted image.  Does this look correct?

[fanfare · Accepted solution]

It is the way TurboTax does it..
line 54 is zero which means line 55 is zero.

you are within the correction window so you should mark YES instead of NO.

@cramanitax 

[nholdway]

dmertz's answer above is looking more like the correct answer: You don't say "yes" for Line 55 if you are requesting a waiver from any penalty -- even if you did receive a distribution in the next calendar year (Feb. 28 for the case in this discussion; I have a case myself where the distribution was taken this March). The IRS' definition of "the corrective window" in its Form 5329 instructions is indeed unclear ("when the tax was assessed?"). 

If you do say yes for Line 55, then you wind up paying the 10% (or 25%) penalty, no? And we're trying to avoid that. TurboTax EasyStep doesn't even ask this for Line 55, actually; we see it only on the form itself.

[dmertz]

It might make sense to mark the checkbox on Form 5329 in case the IRS denies the waiver.  If the IRS grants the waiver, the marking of box shouldn't matter.  In TurboTax the marking determines the amount by which line 54 gets multiplied.

[nholdway]

Lastly, technically, for 2024 taxes, the 1099-R will likely reflect the 2023 + 2024 distributions and related taxes so is there anything else that needs to happen other than reporting it normally as an RMD?

I'm wondering about this last part, too. It's not urgent, but I'm curious how it'll go next year when we do the 2024 tax return. Will there be a way to note that the distribution was for 2023? Or does it not even matter because the income comes and the tax would be paid in 2024 anyway, not in 2023? (Which adds to the 2024 tax burden, but those are the breaks, right?)

[nholdway]

On marking Yes for Line 55 anyway, we would have to do that directly on the form, it appears, because EasyStep doesn't ask. As long as the penalty tax isn't actually added prematurely (guess we could try it and see what results), should be OK. (Then if the IRS says no, it would send a bill for that tax.)

[cramanitax]

Still a bit confused.  So if I am requesting the entire penalty be waited, and Line 54 is zero, then should I actually leave line 55 BLANK and the form is still correctly completed?  As another member posted, if I answer "Yes" to the corrective widow question then do I have to have a value in Line 55 and would that value be zero (since I am requesting the waiver)?  

Thanks.

[dmertz]

"So if I am requesting the entire penalty be waited, and Line 54 is zero, then should I actually leave line 55 BLANK and the form is still correctly completed?"

Yes.

The distribution made in 2024 to complete the 2023 RMD will be taxable on your 2024 tax return (along with the RMD that you take for 2024), no explanation needed.

[hiwatt]

My custodian failed to make a required automatic withdrawal by year end 2023. I had that corrected by Feb 8. I filed form 5329 and requested a full waiver of the penalty, but I left line 55 blank and did not check the "Yes" box. I filed by mail so that I could include documentation from the custodian stating that they made the error and had made the distribution in 2024 and stating the amount.

Middle of May I got hit with a CP111 notice assessing taxes due equal to 75% of the missing distribution! The CP11 stats that they found an error on my return in in transferring the tax from form 5329. It appears they expected a value on line 55, which would be transferred to line 8 of 1040 schedule 2.

I completed the 5329 entries myself - not step-by-step, and note that when a waiver is requested, if one tries enter an amount of line 55, one cannot and the software redirects to the Explanation Statement. I also note that in the IRS instructions the amount one requests to be waived that is entered in the white space on line 55 (following "RC") is supposed to be enclosed in parenthesis.. which turbotax fails to do... one cannot add them manually either.

Bottom line, everything points to TurboTax massively screwing this up. The CP11 gives one a deadline by which they must be contacted by phone or mail to contest and request correction, but the folks on teh phone can do absolutely NOTHING for you.

Beware..

[fanfare]

I think you meant 25% which is the new penalty with no excuse.

If you try to fill it out yourself, and have never seen the proper result printed, it's likely you will get it wrong.

To request a waiver of all penalty, Line 54 must be zero (see Instructions).

Also, you must attach an explanation.

@hiwatt 

[dmertz]

TurboTax prepares the form correctly according to the instructions for Part IX of Form 5329.  Assuming that you meant 25%, not 75%, it seems that either the IRS examiner has made an error in not recognizing the request for waiver or the waiver was denied.  Only the IRS can answer which one is the case.

[fanfare]

I suspect the waiver was denied because no explanation was attached.

Regardless, include your explanation in your  written response to the IRS letter.