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Ask the IRA Gurus

IRA experts weigh in on a tricky situation a client has with the IRS.

Natalie Choate, 09/09/2011

Natalie Choate will be speaking at a location near you if you live in New York, NY (9/12/11), Fargo, ND (9/13/11), South Bend (9/15/11) or Evansville (11/16/12), IN, Sioux Falls, SD (9/16/11), Portland, ME (9/20/11), St. Louis, MO (9/26/11), Atlanta, GA (9/27/11), Waltham (10/14/11) or Boston (11/10/11), MA, Westlake (10/17/11) or Cincinnati (2/10/12), OH, Vero Beach, FL (10/20/11), San Diego, CA (10/27-28, 2011), Minneapolis, MN (11/14/11), St. Charles, IL (11/15/11), Memphis, TN (12/1/11), or Spokane, WA (5/8/12). See all of Natalie's upcoming speaking events by clicking here.

Sometimes I get an IRA question to which I don't know the answer. That's when I turn to my nationwide circle of IRA experts. I call them the "IRA gurus." With their astounding collective experience and knowledge, they can often help. So keep those questions coming!

Question: Our client's father, "Homer," is in his 90s. Since he was 70 1/2, he had his IRA minimum distributions sent to him by monthly automatic transfer into his bank account. This had been arranged for him each year by his IRA provider. Last year, he moved closer to his son's (our client's) home because of some serious health problems and in the process moved his IRA to a different provider.

However, he neglected to reinstate the automatic sending of the required distributions. His health issues contributed to a declining ability to manage his affairs. As a result, he failed to take the required distributions for the year 2010. Homer's son helped him with his 2010 tax return, and had him file "Form 5329" as part of the return, reporting the missed distribution and requesting a waiver of the 50% penalty. Now, the IRS has just sent him a notice that the penalty is due--with no mention of the waiver request. Is there anything Homer can do at this point to avoid that penalty?

Answer: I don't have experience with this situation so I turned to my IRA gurus. These enormously knowledgeable and productive people manage to not only speak and write about retirement benefits, they also actively consult with, advise, and/or represent clients who have retirement benefit issues with the IRS. They had plenty of practical suggestions for Homer.

Barry Picker of Brooklyn, N.Y., author of Barry Picker's Guide to Retirement Distribution Planning, speaks nationally and actively practices in the retirement benefits tax area. He says, "The IRS response sounds like a computer-generated notice caused by the filing of the 5329. I've had this before. Don't pay; respond with a letter to the address on the notice explaining the situation and requesting the waiver. Chances are good you'll succeed."

Bob Keebler, CPA, of Green Bay, Wis., nationally known speaker and author of multiple publications dealing with the tax treatment of IRAs and Roth IRAs, heads his own accounting firm that specializes in helping individuals solve their IRA versus IRS problems. Bob has drafted more than150 successful IRS private-letter ruling requests in the retirement benefits area. He was succinct: "I agree with Barry!"

Denise Appleby, author of the invaluable Appleby IRA Quick Reference Guides, reminds the questioner that, "It's not enough to explain why you missed taking the minimum required distribution. You also must 'take steps to remedy the shortfall,' meaning that Homer must take the 2010 distribution now, in 2011, before asking the IRS to waive the penalty. Both steps are required before the IRS will consider granting a waiver."  

Natalie Choate practices law in Boston, specializing in estate planning for retirement benefits. Her book, Life and Death Planning for Retirement Benefits, is fast becoming the leading resource for professionals in this field.

The author is not an employee of Morningstar, Inc. The views expressed in this article are the author's. They do not necessarily reflect the views of Morningstar. The author is a freelance contributor to MorningstarAdvisor.com. The views expressed in this article may or may not reflect the views of Morningstar.
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