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RMD taken, but not reported


Zoey

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I received a call from a financial advisor who has a solo-k client.  The client has taken his RMD's faithfully for 10 years.  The TPA who had the plan was told that the financial institution calculates the RMD and distributes it automatically.  They were also told that the financial institution would prepare the 1099-R each year.  Fast forward to 10 years later.  The plan terminates and the client rolls his assets to an IRA (with the same financial advisor and same financial institution).  When the TPA inquired as to the amount of the rollover and confirmation again, that the financial institution would be preparing the 1099-R, they informed them that they found out that there was never a 1099-R issued by the financial institution...ever.  I asked if the financial institution withheld federal withholding, and if so, the IRS should have caught it (as they would have received 945 withholding and have nothing to tie it to), but that hopefully it's not as big of an issue as it could be then.  They stated that they confirmed that the financial institution never withheld federal withholding.  YIKES!  So I asked if the client reported the income on his taxes.  They stated that they don't believe he did.  DOUBLE YIKES!  So they asked what would be involved in correcting this.  However, the owner is now incapacitated and his son has power of attorney.  To be honest, I have no idea how to fix this and how far back we have to go.  I have never had this issue.  Has anyone had this problem or know what needs to be done, or can direct me to a cite.  Thank you so much.

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First, there is no mandatory 20% withholding on a RMD, as it is not an "eligible rollover distribution." The participant could then have elected out of 10% withholding. So although there is no excuse for no 1099-R being filed, there may not be any penalties for failing to withhold. Failure to declare it as taxable income is another story.

Beyond that, the son needs to take this to tax counsel. Did the institution agree, in writing, that they were responsible for 1099-R reporting? (I doubt that anyone else was responsible, as "solo-k" plans rarely have a TPA. ) But, the financial institution may be relying on maximum deniability, and be very unhelpful. Or maybe they will step up to the plate. Again, he son should go to tax counsel.

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Thanks so much Belgarath! 

I knew it wasn't subject to the 20% mandatory withholding, due to not being eligible for rollover, but I would have thought the 10% would have been taken, although as you stated, he "could" have elected out of it.  Although I'm not sure he elected anything.  It sounds like everything was done automatically without any completed forms.  I doubt the institution stated anything in writing as to who was responsible for filing the 1099's.  The financial advisor tells me that they get a different answer every time they call, depending on who they talk to, and wouldn't swear to it, that during one of those calls they may have been told that the institution would be preparing them.

I agree, his biggest issue is going to be the tax consequences on his tax filings.  But I didn't know if they would need to generate 1099-R's for the missed 1099-R's or needed to report something to the IRS from a plan compliance standpoint.  They were asking for my help in making this compliant, after the fact.

Again, thank you!

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I have never seen a brokerage (I expect the institution was not a bank) on a retirement custodial account do any sort of tax w/h and reporting, they'll cut checks to the account holder but that's usually it - don't know what anyone else's experience is, but that should have been a red flag from the start.

Not to further alarm, but failing to report income like that is tax evasion, pure and simple, and is the kind of thing for which people go to prison. A lawyer told me long ago, you can play with deductions and if you get caught you get taxes, interest and penalties, but you hide income and get caught you go to prison. So a tax lawyer should be hired to clean this up ASAP unless it no longer matters based on account holder's incapacity. But if son wants to protect for his future benefit and sleep at night, they will want to address. Good luck.

Kenneth M. Prell, CEBS, ERPA

Vice President, BPAS Actuarial & Pension Services

kprell@bpas.com

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Thanks CuseFan.  I have seen some brokerage firms (depending on how they set up the account(s)), prepare 1099's.  I had some plans with brokerage accounts in the past, where they did prepare the 1099's.  I have another brokerage firm that I currently have mutual clients with, that also prepares them, but only on some of their accounts.  I only found this out after I too, had prepared the 1099-R for the plan...ugh.  But you are right, most do not.  So, when I am working with brokerage accounts, I confirm with the financial advisor if I will be preparing the 1099's for the plan or not. 

Your advice is basically what I told the financial advisor.  Have the son talk to his Dad's accountant to find out for sure if he did or did not claim it as income each year.  And if he didn't, then they need to contact a tax attorney.

Thanks!

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Agreed that most do not. But most do not calculate the RMD either unless it's an IRA. And when it's an IRA, most do prepare the 1099-r. So it's a bit of a mixed bag here. The paperwork for the account or the request to prepare the RMDs will specify, I would think.

William C. Presson, ERPA, QPA, QKA
bill.presson@gmail.com
C 205.994.4070

 

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7 hours ago, CuseFan said:

Not to further alarm, but failing to report income like that is tax evasion, pure and simple, and is the kind of thing for which people go to prison.

Actually, to go to prison (in United States) you need to have criminal intent. You also need intent to take the statute of limitations out beyond the 3- or 6-year that is otherwise applicable, depending on the magnitude of the exclusion.

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

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On 4/13/2021 at 12:36 PM, CuseFan said:

I have never seen a brokerage (I expect the institution was not a bank) on a retirement custodial account do any sort of tax w/h and reporting, they'll cut checks to the account holder but that's usually it - don't know what anyone else's experience is, but that should have been a red flag from the start.

Not to further alarm, but failing to report income like that is tax evasion, pure and simple, and is the kind of thing for which people go to prison. A lawyer told me long ago, you can play with deductions and if you get caught you get taxes, interest and penalties, but you hide income and get caught you go to prison. So a tax lawyer should be hired to clean this up ASAP unless it no longer matters based on account holder's incapacity. But if son wants to protect for his future benefit and sleep at night, they will want to address. Good luck.

Sorry, a little late to this conversation.  As a former IRS Revenue Agent let's be a little more careful with the "tax evasion" term.   The law defines tax evasion as:

 

“Any person who willfully attempts in any manner to evade or defeat any tax imposed by this title or the payment thereof shall, in addition to other penalties provided by law, be guilty of a felony and, upon conviction thereof, shall be fined not more than $100,000 ($500,000 in the case of a corporation), or imprisoned not more than 5 years, or both, together with the costs of prosecution.”

 

A little legal commentary here:

Proof of the crime requires first proving the attendant circumstance that an unpaid tax liability exists.  Second, the prosecution must prove some affirmative act by the defendant to evade or attempt to evade a tax.  Third, prosecutors most show that the defendant possessed the specific intent to evade a known legal duty to pay.  To convict, the jury must find the defendant guilty of each of these elements beyond a reasonable doubt.   

 

https://www.law.cornell.edu/wex/tax_evasion

 

Note there are intent elements to this crime that have to be proven to convict for that crime.  the risk of prison is very, very close to 0%.  

Even the civil fraud case would be hard to make here. 

 

I can't imagine any Revenue Agent who found this would talk about a fraud referral.   On the other hand there is a very real civil penalty for negligence that I could see a Revenue Agent who caught this would try and apply.  

IRS talks about negligence this way:

"Negligence" includes (but is not limited to) any failure to: make a reasonable attempt to comply with the internal revenue laws exercise ordinary and reasonable care in preparation of a tax return or keep adequate books and records or to substantiate items properly This penalty may be asserted if you carelessly, recklessly or intentionally disregard IRS rules and regulations - by taking a position on your return with little or no effort to determine whether the position is correct or knowingly taking a position that is incorrect. You will not have to pay a negligence penalty if there was a reasonable cause for a position you took and you acted in good faith.

https://www.irs.gov/pub/irs-news/fs-08-19.pdf

 

https://www.nolo.com/legal-encyclopedia/negligence-versus-tax-fraud-irs-difference-29962.html

 

Sorry for the long link choked comment but discussion of prison here seemed to be over done in my mind.  

 

 

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Sorry, just wanted to emphasize that not reporting taxable income is a serious issue, and the lack of reporting potentially happened in two manners - by the account payer (which appears to be the account owner) and the recipient (same person). And ex-ballplayers have gone to jail for not reporting income from autograph selling shows. The situation above may certainly not rise to the level of tax evasion, but the seriousness of the situation should not be overlooked, that's all - and that comment from an attorney years ago have stuck with me.

Kenneth M. Prell, CEBS, ERPA

Vice President, BPAS Actuarial & Pension Services

kprell@bpas.com

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How big were the RMDs?

A few thousand each?  Tens of thousands?  Hundreds of thousands?

I sure the govn't gets less lenient the bigger the un-reported payouts got.

Could the IRS disqualify the Plan for something like that?  Obviously some sort of operational failure on part of the Trustee to assure the participant (himself) received the proper tax reporting documents.

Also, does the govn't cross check between r/o on 5498 and 1099-R under the same SSN?

QKA, QPA, CPC, ERPA

Two wrongs don't make a right, but three rights make a left.

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  • 1 month later...

Wow...I am so very sorry I did not respond to these posts.  I did not receive notification that I had more responses.  I just came out here to search for something else and seen I had responses.

Thank you all so much for your input.  And I appreciate your explanation and links ESOP Guy.

BG, a few thousand... 4-5K each year.  And I have no idea if the gov't cross checks.  That was my question too... how it wasn't caught.

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