Major Penalty Changes Involving Failure to Take Timely Required Minimum Distributions from Retirement Accounts (Including IRAs)

Instructions and links to the video and audio downloads are included in the PDF study guide for Mr. Golderg’s dissertation.

Contents of the Study Guide

• Major IRS Penalty Changes Under the Secure 2.0 Act of 2022
• Major Developments to the IRS penalties on shortfall distributions from retirement accounts, including IRAs that apply to the taxable year 2023 and thereafter that every practitioner must know
• IRS Investigative Techniques Regarding Retirement Issues
• IRS Enforcement and Taxpayer Service
• New Updated Version of Internal Revenue Code Section 4974
• Comment letter by Seymour Goldberg to Treasury on January 26, 2024, regarding significant tax traps under the new excise tax rules
• Comment letter by AICPA dated December 12, 2023, to IRS regarding changes to 2023 Form 5329
• Circular 230 violations
• Automatic Waiver of the Excise Tax Rules Under Secure Under Certain Circumstances

Summary of Mr. Goldberg’s Dissertation

(with time stamps for the video and audio)

• Retirement account penalty changes. 0:21
  • Seymour Goldberg discusses new penalty rules for retirement accounts, including IRAs, due to lack of understanding and violations.
  • Accountants and tax professionals must understand distribution rules to avoid penalties.
• IRA penalty options for 2023. 5:17
  • Example: Jack must decide whether to pay 25% or 10% of $20,000 in penalty for tax error.
  • Jack should then take out $20,000 from his IRA in February 2024 and file a return for 2023, including a Form 5329 for the 10% excise tax.
• Tax law correction window and IRS assessments. 10:09
  • The confusion around the “correction window” in the context of a violation of the tax law, citing misunderstandings and incorrect interpretations.
  • Detailed analysis of the statute and a simplified explanation of the correction window (subject to two exceptions) starting from the end of the violation year in 2023.
  • The correction window for excise taxes is generally a two-year period from the end of the year of the violations to the end of 2025.
  • The IRS can issue an assessment or a 90-day letter before the end of the correction two-year window, which can negate the benefit of the 10% rule.
  • The IRS corrected their draft instructions to Form 5329 for 2023 in January 2024 indicating that the correction window is not always two years.
  • And not wait until 2025 to correct required distributions, as the IRS has sophisticated computer capabilities to identify and audit
• IRS penalties and waivers for tax returns. 19:48
  • Alternative to waiting for the IRS to assess the shortfall penalty from a retirement account, highlighting the importance of understanding the rules and potential consequences.
  • References IRS newswire article that stated a two-year window period for correcting IRA shortfall mistakes without mentioning the two exceptions to the two-year window period.
  • The importance of understanding the 5329 Form and potential penalties for non-compliance.
  • Examples of lame excuses that might be used to avoid paying the excise tax penalty, but warns against using such lame excuses.
• IRS penalties and waivers of excise taxes. 26:03
  • Advises IRA owners against using improper waiver excuses without documentation since it may lead to perjury issues.
  • The importance of accurate documentation to avoid potential penalties and to prove compliance with tax laws.
  • Discussion of the IRS correction window for tax returns, clarifying confusion around imposed deadlines.
• IRA distribution rules and excise taxes. 31:28
  • The argument for the 10% excise tax, based on a violation in 2023. Assume no valid waiver excuse.
  • Example: Harry should take a $100,000 shortfall amount from his IRA on January 15, 2024. Harry should act promptly if he has no valid excuse and especially if Harry is not well.
  • IRS is concerned about individuals not taking required minimum distributions (RMDs) from retirement accounts, citing a 2008 General Accounting Office
• IRS audits and tax compliance. 38:58
  • Warning: IRS audit risks due to automated matching of financial information.
  • Expert discusses IRS outreach programs for tax professionals and their effectiveness.
• IRA penalties and waivers. 44:05
  • How the lstatute and IRC Section 4974 have been combined, regarding shortfall distributions in order to more fully understand the new IRA shortfall penalty rules starting in 2023.
  • Accountants face challenges for IRA owners who pass away in completing valid waiver requests. This happens if the IRA owner dies prior to taking corrective action with respect to an IRA shortfall distribution. There is no clear solution in the IRC on how to handle this type of issue with respect to a shortfall IRA distribution.
• IRA rules and tax implications. 48:33
  • Discussion: A client’s IRA and the potential for beneficiaries to dispute the distribution of funds after the IRA owner’s death.
  • Should IRS require financial institutions to provide information on inherited IRAs to beneficiaries of inherited IRAs.
  • How new tax rules will impact the accounting profession and the need for nationwide outreach programs regarding these new rules.
• IRS waiver requests and penalties. 56:24
  • Advocating for IRS response to waiver requests to avoid penalties and protect taxpayers.
  • Insisting on informed consent by IRA owner for waiver requests and the right to withdraw them.
• Excise tax penalties and abatement. 1:01:24
  • Forgetfulness should not be an excuse for excise tax penalties, unless there is a chronic disability.
  • Why should the government consider the age and health of taxpayers when imposing excise tax penalties?
  • Let’s use the example of an 80-year-old taxpayer who may have difficulty handling a 25% excise tax from a physical or mental point of view.
  • A Suggestion: A one-time automatic abatement of a 25% excise tax for those who have never been delinquent in the past and agree to engage an advisor to make sure that required minimum distributions are timely made in the future.
• IRA rules and penalties with a focus on beneficiary rights. 1:06:12
  • Focus on correcting errors in Form 5329 for fiduciary returns.
  • The IRS requires that the beneficiary of a decedent’s IRA must take out the required minimum distribution that the deceased IRA owner failed to take out for the year of his/her death
  • How the beneficiary can take out the unpaid required minimum distribution for the year of death of the IRA owner by the beneficiary’s tax filing deadline (including any extension thereof) for the taxable year of that beneficiary that begins with or within that calendar year in which the deceased IRA owner died in order for the beneficiary to avoid the excise tax penalty. This is an automatic waiver rule.
  • The automatic waiver rule applies if a beneficiary dies before taking out a required minimum distribution as well. In that case, the beneficiary’s beneficiary can take advantage of the automatic waiver rule.

Sample Page from the Study Guide

Automatic Waiver of the Excise Tax Rules Under Secure Under Certain Circumstances

According to the proposed regulations under Secure the 50% excise tax may be waived by the IRS if: The failure to distribute the required minimum distribution is due to reasonable error and reasonable steps are taken to remedy the failure.

According to the introductory portion of the proposed regulations under Secure there are two situations with respect to which there is an automatic waiver of the 50 percent excise tax.

The first situation is when

(1) The [IRA owner] died before his/her required beginning date;

(2) the payee is an eligible designated beneficiary who did not elect to use the life expectancy rule but is subject to the life expectancy rule under the [IRA agreement] or an IRS default provision that applies in the absence of an [IRA agreement] provision;

(3) the payee [eligible designated beneficiary] did not satisfy the required minimum distributions [under the life expectancy rule]; and

(4) the payee [eligible designated beneficiary] elects for [the deceased IRA owner’s account balance] to be distributed under the 10-year rule.

In that case, once the payee elects the 10-year rule, [by the end of the ninth calendar year following the calendar year of the [IRA owner’s] death, then the payee’s required minimum distribution in the tenth calendar year following the calendar year of the . . . IRA owner’s death is the entire [IRA] account balance.

Author’s note

The second situation with respect to which an automatic excise tax waiver is triggered when an individual had a minimum distribution requirement in a calendar year and died in that calendar year before satisfying the minimum distribution requirement.

In this second situation, the individual’s beneficiary must satisfy the minimum distribution requirement by the end of that calendar year.

However, if that beneficiary fails to satisfy the minimum distribution requirement in that calendar year, then the [50 percent] excise tax for the failure to take the distribution is automatically waived provided that the beneficiary satisfies that requirement by no later than that beneficiary’s tax filing deadline (including extensions thereof) for the taxable year of that beneficiary that begins with or within that calendar year [in which the deceased IRA owner died].

Please note that the automatic waiver rules described in situation 1 and situation 2 are effective for taxable years beginning on or after January 1, 2022.

These automatic waivers would also apply to the new 25 percent excise tax [instead of the 50 percent excise tax] starting in 2023 and thereafter.

These automatic waiver rules apply to a deceased employee and his/her respective interest in a plan.

Credentials

SEYMOUR GOLDBERG, CPA, MBA, JD, is a senior partner in the law firm of Goldberg & Goldberg, P.C., Melville, New York. Professor Emeritus of Law and Taxation at Long Island University. Former Director of the Tax Institute of the C.W. Post Campus of Long Island University. In that capacity he worked with the IRS in conducting many tax programs for professionals. Recipient of the American Jurisprudence Award in Federal Estate and Gift Taxation from St. John’s University School of Law.

CLE instructor for many professional organizations, including the New York County Lawyers Association, New York State Bar Association, American Bar Association, NJICLE, City Bar Center for CLE, local bar associations and law schools. Mr. Goldberg is admitted to practice law in New York State.

Authored 4 manuals for the American Bar Association on IRAs and Trusts and other organizations such as the AICPA on the IRA Distribution Rules. His first Guide, entitled “A Professional’s Guide to IRA Distribution Rules,” was published by the Foundation for Accounting Education for the years 1993-1998. He has been interviewed on many technical IRA issues for Ed Slott’s IRA Advisor.

Mr. Goldberg handles probate matters, tax disputes with the IRS (civil and criminal) and the IRS appeals office, IRA penalty waivers and New York State Department of Taxation tax disputes and participated in significant estate disputes. Represents clients in IRS ruling requests (over 75). Wrote an amicus brief in the 2014 inherited IRA Supreme Court Case, Clark v. Rameker.

His manuals for the American Bar Association can be found in well over 100 law school libraries throughout the United States, including the New York State Appellate Division, Fourth Department, Law Library, Rochester, New York. He is a member of the Relations with the IRS Committee of the New York State Society of Certified Public Accountants and Chair of a subcommittee on Communication & Coordination with the IRS. He was formerly associated with the Internal Revenue Service.

Mr. Goldberg has conducted continuing education programs on the retirement distribution rules with the IRS. He has recommended corrections to IRS Publication 590, working pro bono with the IRS and then Congressman Steve Israel. This resulted in IRS revisions and adoption of IRS Publication 590-A and IRS Publication 590-B. He has written many comment letters to the Treasury and IRS on technical issues, including systemic issues of first impression.

He received Outstanding Discussion Leader Awards from the AICPA and the Foundation for Accounting Education. He has conducted over 300 CPE programs in taxation, including over 100 CPE programs involving IRAs and IRA Compliance issues and CLE and CPE programs involving the Uniform Principal and Income Act in multiple jurisdictions.

Mr. Goldberg has been quoted in the New York Times, Forbes, Fortune, Money Magazine, U.S. News & World Report, Business Week and the Wall Street Journal. He has also been interviewed on CNN, CNBC and WCBS.

Mr. Goldberg can be reached at 516-222-0422 or by email at info.goldbergira@gmail.com. You may also visit his website at TrustEstateProbate.com.