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John Grahovac

What does the IRs require for waiver of the excise tax on Form 5329 fo

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Client's husband was a physician and sole participant in a profit sharing plan with a corporate trust company as trustee. After his death at age 75 we discovered that minimum distributions had never been made and the trust company had never informed him of the need to do so.

Since learning of the problem she has received the minimum distributions for the years after his death, terminated the plan and the services of the trustee, rolled the funds over to a new IRA and begun receiving minimum distributions from the IRA. However, there are still 3 years for which no distributions were made and excise taxes on Form 5329 are due.

The instructions say the IRS may waive the tax if it was due to reasonable error and "you are taking appropriate steps to remedy the shortfall."

Assuming that blaming the Trustee is accepted as reasonable error, will the IRS require a distribution of the minimum distribution amounts from the 3 earlier years in addition to the amount for the current year as a condition of the waiver? If so, must the client make the distribution before the waiver request and run the risk of having it denied? Is there any chance that merely correcting the errors going forward will be sufficient for the waiver without making the distribution for the earlier 3 years?

Thanks

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We have had great luck in filing the Form 5329 with a statement on the form, "waiver requested see attached statement." Our attachment, "Request for Waiver Under Internal Revenue Code section 4974," details the reasons and begs forgiveness, yada, yada, yada.

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Form 5329 will successfully abate the tax, but if you never corrected the problem, then it will not. I think from what you have stated, you have rolled ineligible funds to the IRA (and thus, have also caused an excise tax issue in the IRA). If you really want to come clean, I think you need to distribute all missed RMDs as soon as possible, adjusted for earnings since the time they should have been distributed. Then, you file the Form 5329 with the IRS and beg for forgiveness. However, since these funds rested in an IRA, I think your client will also owe the excess contribution tax which is (??) 6%.

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The instructions for the Form 5329 require you to send in the tax. If the IRS approves of your reason, they will return the money. Has anyone ever sent the form in without the tax (especially when the MRD has been corrected and the tax paid)? Any thoughts??

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I have never submitted the tax with the form (see above). We have received letters from the IRS acknowledging the tax abatement.

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Thanks for the advice. I have a situation now where the client screwed up and took the MRD last week (instead of prior to 12/31/2000) He will include the tax on his 2000 income tax along with a note so the tax will be timely paid. I am fairly confident that the IRS will waive the penalty but don't want to have to pay twice (my client wants the use of his money - I don't blame him).

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