Calculation of 50% Excess Accumulation Tax on Missed RMD

[Guest jnsjr]

An IRA owner died in 1995 before his required beginning date. No distributions were taken from the IRA until 2004, when the IRA was totally distributed to the beneficiary. Under the proposed minimum distributions existing at that time, the IRA beneficiary had to either (1) start lifetime distributions in the year following the year of the owner's death or (2) fully distribute the IRA in the fifth year following the year of death (which in this case was 2000). Since lifetime distributions were not started, the default at that time was the five year rule. So, the IRA should have been completely distributed in 2000.

My question is, since the IRA should have been fully distributed in 2000, but nothing was distributed until 2004, how is the 50% penalty calculated and reported on Form 5329? From reading the IRS instructions for 5329, IRS Publication 590 and Treasury Regulations Section 54.4974, it is not totally clear whether (1) a 2004 form 5329 should be filed with the 50% penalty calculated on the lump sum distribution made during that year or (2) a 2000 form 5329 should be filed and the 50% penalty calculated on the 12/31/00 balance. If the answer is #2, then does that mean that forms 5329 should be filed for every year from 2000 to 2004 (when the lump sum distribution was made)? The above referenced instructions lead you in the direction of the latter response, but that would amount to a 200% penalty on the total balance in the IRA, which seems a bit absurd.

I am aware that the IRS provides for a refund of the 50% penalty, but the Publication 590 says you must pay the penalty first, so I have to deal with these questions.

Any guidance, especially actual experience, is appreciated.

[ElGuapo]

This is less of an answer and more of an add-on question, but I wonder if it wouldn't be better to pay the penalty based on the first rule of distributing over the life expectancy from the year of death?