California residents are probably beginning to gather all their documents in preparation for filing their taxes soon. The IRS is becoming aware of taxpayers who are not in compliance with the requirements of IRA distributions and are issuing a warning that they will be cracking down to help shore up losses in tax revenue. The penalty for failing to comply can quickly add up, so ensuring the proper deduction is taken is extremely important.
Reports state tax revenue loss for the years of 2006 and 2007 totaled about $174 million. Over a quarter million people reportedly failed to take the required distributions, falling short of the total amount by about $350 million. For many people, it’s simply a matter for forgetfulness. Some people work with firms to ensure they take the required distribution, but others often do it on their own. As time passes, it can become easy to forget about it.
IRA rules can be complex and sometimes depend on how someone receives the IRA. If the IRA is inherited from someone other than a spouse, the rules change and may force someone to take the required distribution prior to the age of 70 years and six months. The penalty for failing to take the distribution can be steep because it is equal to the difference of what was supposed to be taken out and what actually was. For example, if someone should have taken a distribution of $1,000, but failed to take any, they would be penalized $500.
For many California families, those IRS penalties can be difficult to pay and can end with someone in mounting tax debt. The IRS website has helpful information, but if someone does get over their head in penalties and tax debt, it may be best to seek knowledgeable assistance. IRS rules are complex, especially when it comes to these distributions. Sometimes, asking for help is the best way to help solve any issues.
Source: CNBC, “IRS Reminds You to Take IRA Distributions – Or Else,” Susan Tompor, Dec. 20, 2012