Getting Personal: How to avoid a tax penalty
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.
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