IRAs and Tax Debt
Lately, the IRS has shown an increased willingness to seize IRAs and retirement accounts to pay delinquent tax debts. These deplorable levies are genuinely frightening to a retiree who cannot survive on Social Security alone. IRS management moves slowly in it’s approval of such levies.
If you are tax payer with sizable tax debts, it may behoove you to take the distribution of the IRA, even if you have to pay a premature distribution penalty, rather than risk having it seized. As the IRS moves slowly on such seizures, you may be able to spread the tax hit over two and possibly even three years.
In any case, once you have reached the age of 70 and ½, required minimum distributions (RMDs) or withdrawals must commence. The tax write off each year was a nice one over your earnings lifetime. Now it is time to pay the piper and all distributions will be taxable.
The basic RMD calculation is made by dividing the account balance at the end of the prior year by the distribution period obtained from the Uniform Life Table. If you do not calculate and withdraw the correct RMD, the amount not withdrawn is taxed at 50% – a draconian penalty. Fortunately, there is a reasonable cause exception to provide relief from this penalty..
There is no maximum as the amount that may be withdrawn from an IRA; this is quite important to a tax debtor. An IRA owner can always withdraw more than the RMD. You cannot apply excess withdrawals toward future years’ RMDs.
The IRS will waive the excess accumulation penalty by attaching a statement to the tax return which explains any shortfall was due to reasonable error; and the taxpayer has taken reasonable steps to remedy the shortfall – basically the RMD was taken out of the account as soon as the error was discovered. In addition to attaching the request to the return, taxpayers are required to complete lines 50 to 54 of Part VIII of Form 5329.
For example, John did not take his RMD in 2014 because he had medical issues in 2014; he also changed brokers during the year, and no one reminded him to take the distribution. In March of 2015 John met with his CPA Kathy, his tax preparer, and he realized the RMD was overlooked. He immediately called his broker and ordered the RMD. John will claim the distribution on his 2015 return and the penalty should be abated on his 2014 return.