16 Sep Penalties for forgotten Inherited IRA

Q. I apparently inherited an IRA from my aunt five years ago, but I just found out. What taxes might I owe because I haven’t taken distributions? But I didn’t know it existed!
— Surprised

A. You’re correct that when you inherit an IRA, you must take Required Minimum Distributions, or RMDs.

Not doing so can result in substantial penalties.

Generally, when you inherit an IRA, you must take the distributions during your lifetime or within five years after the original account holder died.

Exactly how much you were supposed to take out will depend on whether or not your aunt was older than 70 1/2 and already taking distributions from the account when she died.

Now, that hefty penalty.

You should take out the missing RMDs now — as soon as possible — and request an abatement of the 50 percent exercise tax for “reasonable cause,” said Gail Rosen, a Martinsville-based certified public accountant.

There are times the IRS will give you a break. Not knowing about the inherited IRA may be considered “reasonable cause,” so you have a decent shot at avoiding the penalty.

“An abatement is requested filing a Form 5329 for each year there was a shortfall and request the waiver,” Rosen said. “The instructions to Form 5329 will tell you how to request the waiver.”

You can mail, certified return receipt requested, each Form 5329 together in one envelope, with a cover letter, asking for the abatement.

You would then report the income from the RMD in the year it is received, Rosen said.

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This post was first published in September 2016.