Late RMD Penalty - File form 5329 and letter of penalty forgiveness with TurboTax online

[Taxpayer_CA_2050]

Thank you Bdllcarroll.

2022 TurboTax Premium dealt with a late 2022 RMD.

5329 in Forms View, found.

It was twitchy++ figuring out how to make it work. 

TT.2022 E-File requires that Line 55 Additional Tax remains blank. 

TT.2022 allows an added statement requesting the waiver electronically in the program.

I searched TT.2022 for Form 5329 before today, it was not found.  This might be user error, fat fingers, or lack of coffee. 

[RB287a]

(edited before any replies to clarify the question better with more brevity) 

[-  macuser_22  -] replied with excellent detailed answer but I'm confused specifically wherein his efile method (using manual Forms fetch and fill) said, 

Begin paste with cutouts of non specific segments:

Enter the forms mode and click on open form. Type in 5329. Choose 5329-T for the taxpayer . . . . . .Scroll down toForm 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 click the "Explanation" button and enter the reason for missing the RMD and your statement requesting a waver.

[-here-]->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.<-[ ? -]

End paste:

But then in the quote from Form 5329 instructions it said. 

Begin paste: 

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 reques for a waiver.

End paste.  

The two methods wording seem confusing whether you have to pay the tax before or after the waiver is determined OR is it to be interpreted that you pay the tax with the Efile or Postal mail and wait to see if you get a refund?

[dmertz]

It's possible to request a waiver on less than the full amount of a missed RMD such there can still be some excess-accumulation penalty due.  If a waiver on the full amount is requested, the amount on lines 54 and 55 will be zero.

[RB287a]

Thanks for the reply dmertz, I understand what you're saying, but the IRS 5329 instructions seem pretty adament about putting the tax due on 5329 line 55 and include Schedule 2 (1040) line 8. In any case, my situation now for the coming 2023 tax return is this.

I've requested ACH transfer of the RMD but given the late date slipping up on me it probably won't arrive at my local acct until Jan 1st or 2nd 2024.  Even with sending a waiver request, it appears to me I will have to  put the full 25% tax on form 5329 which would then reflect on the 1040.  I don't know whether this type of tax is affected by my standard deduction?  But when I do it I guess I'll find out.

[ender]

Update: from when I originally posted this thread to now I never received the penalty from then IRS. All I did was attach a letter to my tax returns explaining the situation and evidence I that I took them immediately when the mistake was realized and I have never heard from them since. 

[dmertz]

"the IRS 5329 instructions seem pretty adament about putting the tax due on 5329 line 55"

@RB287a , if you are looking at the instructions for Form 5329, you seem to be misinterpreting the instructions.  Those instructions say:

1. Complete lines 52 and 53 as instructed.
2. Enter “RC” and the amount of the shortfall 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.

If you are requesting a waiver on the entire amount, line 54 will be zero.  The instructions for line 55 say to multiply line 54 by a percentage.  With line 54 being zero, the result of the multiplication will be zero on line 55.

The instructions go on to say, "If your request is not granted, the IRS will notify you regarding any additional tax you may owe on the shortfall."  If with the filing of the Form 5329 you were required to pay the excise tax on the amount on which you were requesting a waiver, the instruction would instead say, "If your request is granted, the IRS will send you a refund of the excise tax."  The instructions are written this way in an attempt to avoid having to issue a refund because the IRS almost never declines to grant the waiver.

[dmertz]

@RB287a , I see now that you are talking about a late-taken 2023 RMD.  The law regarding this penalty has changed, so the draft instructions and form for 2023 Form 5329 have changed and no longer mention anything about requesting a waiver but instead mention that under certain circumstances such as yours the penalty would be 10% instead of 25% (and never 50%).  However, the portion of the tax code that permits the IRS to waive the penalty for reasonable cause has not been removed from the tax code, nor has the IRS said anything about being more limited with respect to granting waivers.

It appears that TurboTax has not yet implemented any changes to Form 5329 Part IX compared to 2022, so it's not clear if the ability to request a waiver will be removed from TurboTax.  If the ability remains, the instructions for requesting a waiver would likely remain unchanged from those provided for the 2022 Form 5329.

[RB287a]

I appreciate the detailed info ender gave in that he never received the penalty from then IRS after attaching a letter to tax returns. In fact I read all of his posts over again.

Additionally dmertz illuminating the tax code that permits the IRS to waive the penalty for reasonable cause has not been removed, nor has the IRS said anything about being more limited with respect to granting waivers.

This thread has some excellent delineation examples of how to mitigate form 5329, waiver request and any penalty payment. It has greatly helped me. I will also check with a local CPA on my particular scenario prior to submitting waiver with letter.

This is my first slip up on making the RMD date, due to other mitigating issues arriving in December. I was amazed at the 50% penalty amount on this even if a few days late. Even the 2023 lowered amt of 25% seems excessive to me. But who am I to question the IRS.

[dmertz]

With timely correction of the missed RMD, the excess-accumulation penalty becomes 10% by statute.  It could be that Congress lowered penalty to reduce the IRS's motivation for waiving the penalty, but because missed 2023 RMDs are the first to which the statutory reduction in the penalty applies, there is not yet any history of the IRS response to the requests for waivers for late-taken 2023 RMDs.

[RB287a]

Update: Today (12-30-2023) I received message at 11:15am from my Policy custodian telling me the following:

----
We have processed your request for RMD withdrawal from your policy. The proceeds of this withdrawal were distributed per your request.
Here is a summary of your policy values as of December 29, 2023. It is important that you retain this letter for your tax records.
Accumulation Value:                                                      $XX,XXX.XX <-(amt of Policy before RMD)
Total amount withdrawn from accumulation value:     X,XXX.XX <-(RMD amt)
Accumulation value after withdrawal:                          XX,XXX.XX <-(amt of Policy after RMD)
Net Proceeds:                                                                      X,XXX.XX <-(matches RMD)
Signed by VP of Policy company
----
My Question at this point:
Is this signed Letter (dated Dec 29) stating the RMD withdrawal was processed and distributed, qualify me to just fill in the RMD amt on my 2023 1040 on Line 4a.
Or does the actual arrival date of the ACH transfer at my bank account (probably Monday Jan 1, 2024) play into the IRS interpretation of the distribution date? (therein forcing me to do form 5329)

[dmertz]

The custodian says that the distribution was made, so you should expect a 2023 Form 1099-R to be issued indicating that the distribution occurred in 2023.  Also check your transaction history for the account to see the date that they issued the distribution.

[RB287a]

Thanks dmertz, that would seem logical to me, same as someone handed me a check dated in 2023 but I did not deposit it till Jan 2nd 2024.  But nice to have another confirmation when going up against the IRS.   I definitely will send my custodian a thank you message for their prompt processing and sending me that dated letter.

[fanfare]

{ Never Mind. ]

[RB287a]

Also wanted to thank macuser for his excellent delineation and effort in this thread. I wanted to believe him on his first reply in the thread. But it took some more reading of ALL his posts and some extra help from others to convince me. I get a bit paranoid with the IRS.

I think I have IRS PTSD from the days when I ran a business and my accountant somehow forgot to fill in the Unemployment payments I'd made on employees. The IRS sent me a notice I had 10 days to respond or face possible fine and or jail time.

I promptly sent the IRS an explanation of the missed entry along with a copy of the canceled check previously paid to my State's Unemployment fund.

The IRS responded a month later stating that they had received my letter and canceled check and that they would look into the matter and respond within 60 days.