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February 2022

Helping IRA Owners and Beneficiaries Who Missed Their 2021 RMD

Many times a person who missed taking their 2021 RMD by December 31, 2021 wants to understand what they need to do to be in compliance with the federal income tax laws. The main task - withdraw the missed RMD as soon as possible in 2022. The IRS uses the term “shortfall” and the term “excess accumulation.”

The tax rule is - a person pays tax on an IRA distribution for the year the person receives the distribution. The person will have two taxable distributions in 2022. There is no way to have the 2021 RMD amount taxed in 2021 if the December 31, 2021 deadline was missed. Backdating is tax fraud. A small problem could become a much bigger problem.

A person who failed to withdraw their 2021 RMD by December 31, 2021 owes the 50% excess accumulations tax unless the IRS would decide to waive the 50% tax.

How and why does the IRS waive the 50% tax?

A person is to attach a note of explanation why they believe the IRS should grant them relief. The IRS instructions for Form 5329 furnish no guidance when the IRS believes a person should be granted relief. We suggest that the reasons would be similar to those that apply when someone is granted relief and allowed to make a late rollover. That is, the missed RMD was the mistake of the IRA custodian/ trustee, there was a death in the family, a family member was seriously ill, the distribution check was misplaced and never cashed, or a postal error occurred.

An IRA owner or beneficiary who has a missed RMD is required to file the 2021 Form 5329. The individual must complete Part IX (Additional Tax on Excess Accumulation in Qualified Retirement Plans (including IRAs). The individual wants to read the IRS instructions for Part IX.

Some IRA owners and beneficiaries will not contest the fact that they missed the December 31, 2021 deadline and that they are not entitled to have the IRS waive the 50% tax. They will complete Form 5329 to indicate that they owe the 50% tax. Line 55 is completed to show this additional tax. This amount is also to be reported on Schedule 2 (Form 1040). Schedule 2 reports Additional Taxes.
Other IRA owners and beneficiaries will submit their request to the IRS that the 50% tax will be waived. How do they do this? What are the IRS procedures?

The IRS has adopted a very taxpayer friendly approach for those persons who want the IRS to waive part or all of the 50% tax. The person enters “RC” and the amount of the shortfall to be waived in parentheses on the dotted line next to line 54 and then enters the result on line 54. Complete line 55 as applicable.

The initial waiver of the 50% tax is a tentative waiver. The IRS will review your request and decide if they will grant the waiver. It appears the IRS decision will either be: waive 100% of the requested amount or waive 0%. It might be the IRS is more likely to grant a person’s request for a waiver if the person doesn’t request a 100% waiver.