Waiving the RMD Penalty
The penalty, called the excess accumulation penalty, for failing to take the required minimum distribution from IRAs and qualified plans is 50% of the amount that should have been withdrawn but wasn’t. Not all trustees (financial institutions) remind their clients to take the distribution or provide what amount the RMD should be, and it is quite easy for elderly individuals to overlook or not understand the distribution rules, resulting in a potentially severe penalty. However, the IRS does have a liberal policy for having the penalty waived.
The instructions for Form 5329 (2021 page 8), provides the procedure for waiving the penalty. Generally, you must show that the failure to take the required distribution was due to reasonable cause and that steps are being taken to remedy the shortfall.
The instructions are extremely brief and basically indicate that the taxpayer must file Form 5329 using the code “RC”, and request relief in a statement attached to the return. The statement should include all of the following:
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Reason for the under distribution
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The steps taken to remedy the under distribution, and
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A request to waive the penalty due to reasonable cause.
This procedure works as long as the waiver request is noticed in processing. The return should not be e-filed even when using Form 8453 because the IRS only pays attention to required attachments to that form. The good news is that the IRS generally waives this penalty once you have their attention File Form 5329 as follows.
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Complete lines 52 and 53 as instructed.
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Enter “RC” and the amount of the shortfall you want waived in parentheses on the dotted line next to line 54. Subtract this amount from the total shortfall you figured without regard to the waiver and enter the result on line 54.
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Complete line 55 as instructed.
The taxpayer must pay any tax due that is reported on line 55. The IRS will review the information and decide whether to grant the request for a waiver. If the request is not granted, the IRS will notify the taxpayer regarding any additional tax that may be owed on the shortfall.