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Tuesday, April 25, 2006

IRS MAKES IT EASIER TO CHALLENGE MINIMUM REQUIRED DISTRIBUTION PENALTY

Owners of an Individual Retirement Account (IRA) who have reached the age of compulsary IRA distributions must withdraw a minimum amount from their IRA each year. The IRS provides a table of what percent of the IRA assets must be withdrawn each year. The Internal Revenue Code requires these distributions so that the owner starts to recognize the deferred taxes attributable to the IRA.

To "encourage" owners to make their required distribution, a whopping 50% penalty is imposed for failure to take the distribution. However, if the owner can show that the failure to withdraw was due to reasonable error and reasonable steps are being taken to remedy the shortfall, the IRS will waive the penalty.

The fly in this waiver ointment has been that the owner must FIRST pay the penalty, and THEN apply for a waiver. For large distributions, this can be a substantial financial burden, and indeed could prevent some taxpayers from even applying for the waiver.

In good news for taxpayers, the IRS has withdrawn its requirement (which was provided for in an IRS Publication and form instructions) that the penalty be paid first before a waiver application can be made.
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