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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."  

Ed Slott, publisher of the terrific Ed Slott's IRA Advisor newsletter, who trains financial advisors how to use retirement benefits expertise to expand their practices, agreed with all of the above: "I would have originally advised him to take the missed 2010 distribution immediately and file the 5329 not only asking for the waiver of the penalty, but also showing that he made up the missed distribution--that he took immediate corrective action upon discovering the error.

"Also state the reason for the oversight, which in this case is logical and, I believe, would warrant a waiver of the penalty. But now he has an IRS notice which must be answered. I would respond that the missed distribution was made up, state the reason for the honest oversight, ask for the penalty to be abated, and it should be abated. In addition, mention that before this, he had a perfect track record of never missing a required distribution because they were withdrawn automatically. Once IRS puts this all together, the penalty should be waived and he should be fine. However, it might take a few letters to get this resolved."

Steve Trytten, an estate-planning lawyer in Pasadena, Calif., with special expertise in retirement benefits (and my co-panelist on an upcoming "Retirement Benefits Myth-Busters" seminar), wonders whether the IRS rejection "is not a denial of the penalty waiver but instead an erroneous action based on older form instructions. The instructions to Form 5329 used to require full payment before a waiver could be considered. Several years ago, the instructions were revised to delete this requirement. Perhaps the next step is to resubmit the 5329 along with a copy of the current instructions and renew the request for waiver of penalty."

Seymour "Sy" Goldberg, a well-known speaker and author on the tax treatment of retirement benefits, also tangles regularly with the IRS on behalf of clients. His stated, "The approach I use with respect to a penalty case in general is to respond to the IRS computer-generated penalty notice several times, and if that does not resolve the penalty issue, then I request an appeal to the local IRS Appeals Office. Based on the facts of this case, the penalty should be waived at either the IRS Service Center or the IRS Appeals Office."

Mike Jones, of Monterey, Calif., speaker, writer, and practitioner, and chair of the editorial advisory board for retirement benefits for Trusts and Estates magazine, concurs that if all else fails, Homer can "Exercise the right to go to IRS appeals with this. If that doesn't work, a suit for abuse of discretion could be needed; such suits are authorized by statute. Given the taxpayer's long history of compliance, it could be an abuse of the IRS' discretion not to waive the penalty."

I am a big fan of my IRA gurus. If they don't know the answer, there is no answer!

Resources: To get acquainted with the gurus, start by visiting their websites: For Barry Picker, go to http://www.pwacpa.com/pickerbio.html. Bob Keebler's website is http://www.keeblerandassociates.com/about. To learn more about Denise Appleby or order her newsletter or Quick Reference Guides, visit http://www.applebyconsultinginc.com/. Meet Steve Trytten at http://www.afrct.com/professionals_Trytten.asp. Mike Jones hangs out at http://www.thompsonjones.com/mikejones.html. To access Ed Slott's information trove or subscribe to the IRA Advisor, go to http://www.irahelp.com/. To enlist the help of Sy Goldberg, start at http://www.goldbergreports.com/.

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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