Life and Death Planning for Retirement Benefits

Chapter 1: The Minimum Distribution Rules

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There are two paths to a waiver of the 50 percent penalty imposed by § 4974(a) for failure to take an RMD ( ¶ 1.9.02 ). One (rarely used) is the automatic penalty waiver for certain beneficiaries who comply with the 5-year rule; see ¶ 1.5.11 (C). The more often used way to negate the penalty is to request a penalty waiver from the IRS. The penalty can be waived by the IRS on a case-by-case basis ( § 4974(d) ) “if the payee described in section 4974(a) establishes to the satisfaction of the Commissioner” that “(1) The shortfall...in the amount distributed in any taxable year was due to reasonable error; and (2) Reasonable steps are being taken to remedy the shortfall.” Reg. § 54.4974-2 , A-7(a). The request for a waiver is submitted with Form 5329; see IRS Publication 590 ( IRAs ). The “payee” does not have to pay the penalty as a condition of requesting the waiver; that condition imposed by the IRS prior to 2005 no longer applies. There are no published rulings or other IRS pronouncements regarding the standards used in determining whether there was “reasonable error.” Presumably the requirement that reasonable steps be taken to remedy the shortfall means that the taxpayer must take the distributions that were missed in prior years before requesting the waiver. 1.9.04 Statute of limitations on the 50 percent penalty In general, the IRS must assess taxes within three years after a required return for those taxes was filed—and there is no statute of limitations if no return is filed. § 6501(a) , (c)(3) . The goal of participants and beneficiaries should be to assure themselves the protection of the three- year statute of limitations with respect to assessment of the 50 percent penalty tax for missed RMDs under § 4974 . A. What is the “return” you have to file? A “return” for this purpose generally means “the return required to be filed by the taxpayer.” In the case of the 50 percent penalty tax, the “return” is Form 5329 (see Reg. § 301.6501(e)-1(c)(4) and instructions for IRS Form 5329). This suggests that all participants over age 70½, and all beneficiaries (including trusts or estates named as beneficiaries) holding inherited retirement benefits, should file Form 5329 every year, even when they believe they owe no penalty. The penalty for failure to take a required distribution is imposed by § 4974 , which is part of Subtitle D (“Miscellaneous Excise Taxes”) of the Code. In the case of an excise tax such as that under § 4974 , “the filing of a return” for the applicable period “on which an entry has been made with respect to a tax imposed under a provision of subtitle D (including a return on which an entry has been made showing no liability for such tax for such period) shall constitute the filing of a return of all amounts of such tax which, if properly paid, would be required to be reported on such return for such period.” § 6501(b)(4) . This suggests that just filing the annual income tax return, Form 1040, with a “zero” entry on the line for “Additional tax on IRAs, other qualified plans, etc.”, could be sufficient to start the statute of limitations running even without filing Form 5329. B. How to avoid the six-year statute. § 6501(e)(3) provides that a six-year statute of limitations applies to Subtitle D taxes (which would include this penalty) “if the return omits an amount of such tax properly includible thereon which exceeds 25 percent of the amount of such tax reported thereon.” If the taxpayer files a Form 5329 or 1040 showing