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We accidentally neglected to take the RMD from one of our two 403b retirement accounts. As soon as we realized this, we had an accountant help us fill out a 5329 form for each tax year. He advised us not to pay the penalty, and ask for a waiver (we have a fairly good personal reason). He appended a terse explanation to the form. Last year, we took all RMDs retroactively and paid taxes on the distributions.

A few months later, we got a vague letter from the IRS telling us to amend the returns. This didn't seem right to me so I called them. The person I talked to agreed: A tax return should reflect what happened, not what should have happened. I don't think that this could be fixed with a amended return. We responded with a letter with more detail. It also asked the IRS to explicitly tell me how to amend the returns if that is what they really want me to do.

Today we got a threatening invoice from the IRS for an outrageous amount, more than the RMDs that we neglected to take, therefore more than twice what the penalty should be (note that the penalty according to form 5329 is 50% of the distributions). No worksheet or explanation as to how they arrived at this amount. It also includes interest and a penalty for paying late. A penalty on a penalty, are you kidding? I have no other pending issues with the IRS, this must be related to the RMD.

I will call the IRS Monday morning and hope that they can explain what is going on. I am hesitant to go back to the accountant. I normally don't use an accountant, so we don't have a longstanding relationship (he would probably not do more for free).

Questions:

Did the accountant give us good advice?

Do you agree that this cannot be fixed with an amended return (a tax return should reflect what happened, not what should have happened)?

Any other advice? I don't think that an attorney is the answer, their fee could easily be more than the amount in question.

Edit: after digging around for a few more hours, I finally found an answer to the second question. From a Forbes article: So, the first step is to remedy the shortfall by having the correct amount distributed. You’ll include it in gross income in the year in which it was actually distributed, not the year it was supposed to be distributed. https://www.forbes.com/sites/bobcarlson/2019/03/19/the-irs-can-and-does-waive-the-penalty-for-incorrect-rmds/#413f44242548

Edit2: after getting a good reprimand for not keeping him in the loop, the accountant is having some success.

Edit3: final resolution: The IRS has finally accepted the waiver, no penalty. Along with the 5329 form, the IRS wanted an amended return for the years in question with no changes! The IRS wouldn't tell me this, but the accountant has better connections with the IRS and he was able to discover this. Maybe the amended return was necessary to help trigger the review process (?).

I ended up paying the accountant 3X what I originally thought I would need to, but I am still way ahead. The moral of the story: 1) trust your accountant. 2) be prepared for weird follow-on costs. 3) if the IRS believes that you are not cooperating, they may punish you, even if it isn't fair (note that I was trying to cooperate).

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You need to obey whatever your accountant gave you for written advice. If you lost it, ask him for a copy of it.

Why? When you retain a tax professional, and seek and follow her advice, then any penalties which arise out of following that advice are waived by the IRS.

IRS nasty-grams are one of two things:

  • Andover being Andover. Doesn't mean they are right.
  • Scammers, who consider senior citizens a rich enough target to be worth a stamp. Since you say "this must be related to the RMD", it sounds like the letter doesn't say so specifically, red flag! That is how confidence games work. They panic you into carelessness... admit it, Monday morning you plan to call the number on the letter and hand over SSN and personal info without a second thought, right?

If you did retain that professional, and did follow their advice, then you should keep them in the loop. They can resolve this a heck of a lot faster than you can. So I would take this to them Monday morning rather than run your mouth on a recorded line to the IRS or a scammer.

Remember, only call agencies back on the official line you found on their web site. Never, ever in a letter or email.

  • The phone number in the letter is the same as on irs.gov/individuals/understanding-your-cp32a-notice 1-800-829-0922 , although mine is a CP504 – Mattman944 Jun 30 at 2:37
  • So, phone number is good, not a scam, thanks for reminding me of the possibility. Any comments on the first two questions? I would like to have some reassurance that the accountant gave me good advice, there are less than qualified people in every profession. – Mattman944 Jun 30 at 6:52
  • @Mattman944 my advice is to rely on the advice of your accountant, so you are sheltered from any penalties that may arise from his bad advice. I'm not sure you put much faith in that. So I suggest your next step is search the Web and IRS documents to confirm it. Anyway I'm reluctant to contradict your advisor's advice because that would break your immunity. – Harper Jun 30 at 15:24

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