The Internal Revenue Service (IRS) requires retirement account owners to take annual distributions, usually starting at age 70 1/2. Those with inherited accounts must also make regular withdrawals. The government imposes hefty penalties for not taking the correct required minimum distribution, or RMD. The taxpayer is held responsible even when a plan administrator or financial adviser miscalculated. However, the government often waives the penalty for an honest mistake if you follow the correct procedures.
Whenever the owner of a retirement account does not take the full RMD on time, the IRS imposes a tax of 50 percent of the difference. The taxpayer must file Form 5329 with the year's federal tax return to pay the penalty. Taking out too much by mistake does not incur a penalty because the IRS allows you to take more than the minimum. However, the IRS does not allow you to carry over a previous year's excess distribution to offset a shortfall.
The IRS may waive the 50 percent penalty if the taxpayer corrects the error, writes a letter of explanation and files Form 5329. Send in Form 5329 along with the 1040 or 1040NR for the tax year of the distribution. If the mistake is for a previous year, use the return or amended return forms for that year. File Form 5329 alone if you aren't required to file a 1040.
Fixing the Mistake
The IRS requires you to correct the mistake to have the penalty waived. Ed Slott, a Maryland CPA, recommends taking action right away before the IRS finds the error. Withdraw the amount of the shortfall from your retirement accounts. Write a letter to the IRS giving a reasonable explanation for the error and showing you have corrected it. Include this letter when you file Form 5329. Slott says that the IRS often forgives the penalty when a taxpayer takes the correct steps.
Filing for a Waiver
Complete your personal information on Form 5329. Fill in the correct RMD on line 50 and the actual distribution on line 51. Subtract line 51 from line 50 to determine your shortfall. To request a waiver for the full amount, write "RC" plus the amount of the shortfall in parentheses on the dotted line next to line 52. For example, if you fell short of the RMD by $1,000, write $1,000 on the dotted line. Write "0" on line 52 to request a full waiver. Complete and file the form with your other tax forms and the letter of explanation.