Getting Personal: How to avoid a tax penalty

Marketplace Staff Apr 8, 2011
HTML EMBED:
COPY

Getting Personal: How to avoid a tax penalty

Marketplace Staff Apr 8, 2011
HTML EMBED:
COPY

Tess Vigeland: And now for our final tax question of the hour.

Therese is with us from Wellesley, Mass. Hi there.

Therese: Hi.

Vigeland: How far are you into your taxes at this point?

Therese: Right now, I’m working my way down through Schedule C, which is just a lot of details. But the issue that has really held me up is one that relates to my 401(k), the issue of the required minimum redistribution. I will tell you that I’m 74 years old, so I have taken down this distribution for three years now. However, I didn’t take it last year, and now I find that I have to file a special form and with it, pay a 50 percent penalty on the amount that I should’ve taken as a distribution, but didn’t.

Vigeland: Ooooh. Frank, is that true?

Frank Degen: Yes, that’s a very very very big hit for a failure to take it. It’s considered an excised tax. However, there is good news.

Therese: What is that?

Vigeland: Yeah, do tell!

Degen: The IRS always gets a bad reputation and let’s face it, they sometimes can be aggressive collecting tax. But in these circumstances, they’re generally very very receptive to a tax payers plea. File the Form 5329 with your tax return. When you file the tax return, I believe it is Part 8, there is a place there where you write in the amount of the distribution you were supposed to take. Let’s just say for argument’s sake, you were supposed to take $2,000 out of your account.

Therese: OK.

Degen: And you failed to do so. So you simply put down there $2,000 and underneath it, there is a little code and the code is “RC,” that you are requesting what’s called “Reasonable cause.” The IRS, if you offer them an explanation — and I think this year especially — many tax payers may have run afoul of not taking the money out. WHy? Because in 2009, you were not required to take it out.

Therese: True.

Degen: In my experience, I’ve never had the IRS turn a tax payer down.

Vigeland: So, Frank, reasonable cause would be as simple as “you know what, I just forgot.”

Degen: That’s not too reasonable, but…

Therese: Well, I was going to use a mercy argument. Basically, I can’t afford this.

Degen: Well, I don’t think that that’s a good argument.

Therese: OK.

Degen: That’s like, for example, saying, “I owe $5,000 and I don’t want to pay it, because I can’t afford it.” A lot of people would use that argument.

Vigeland: They certainly would.

Degen: Reasonable cause would be things like sickness or death of a family member. In the case of the RNDs, however, I think it’s reasonable cause to simply say that if I didn’t take it in 2009, and I did forget because of the change in the law, I think that’s reasonable.

Therese: OK.

Vigeland: Alright, Therese, thanks for the call.

Therese: Thank you very much Tess and Frank.

Vigeland: Bye bye.

Degen: OK Therese, good luck.

Vigeland: And for all you last-minute filers who didn’t hear your questions answered here. Next week, Frank is going to be taking more of them on our blog.

We’re here to help you navigate this changed world and economy.

Our mission at Marketplace is to raise the economic intelligence of the country. It’s a tough task, but it’s never been more important.

In the past year, we’ve seen record unemployment, stimulus bills, and reddit users influencing the stock market. Marketplace helps you understand it all, will fact-based, approachable, and unbiased reporting.

Generous support from listeners and readers is what powers our nonprofit news—and your donation today will help provide this essential service. For just $5/month, you can sustain independent journalism that keeps you and thousands of others informed.