Are Minimum Required Distribution Rules Changing Again?

I wonder what is going on at the IRS when it comes to IRA minimum required distributions.

You may recall that prior law allowed for something called a “stretch” IRA.  The idea was simple, but planners and advisors pushed on it so long and so hard that Congress changed the law.

An IRA (set aside Roth IRAs for this discussion) must start distributing at some point in time. The tax Code tells you the minimum you must distribute. If you want more, well, that is up to you and the tax Code has nothing further to say.  The minimum distribution uses actuarial life expectancies in its calculation. Here is an example:

                   Age of IRA Owner            Life Expectancy

                            72                                    27.4

                            73                                    26.5

                            74                                    25.5

                            75                                    24.6                                        

Let’s say that you are 75 years old, and you have a million dollars in your IRA. Your minimum required distribution (MRD) would be:

                  $1,000,000 divided by 24.6 = $40,650

There are all kinds of ancillary rules, but let’s stay with the big picture. You have to take out at least $40,650 from your IRA.

President Trump signed the SECURE Act in late 2019 and upset the apple cart. The new law changed the minimum distribution rules for everyone, except for special types of beneficiaries (such as a surviving spouse or a disabled person).

How did the rules change?

Everybody other than the specials has to empty the IRA in or by the 10^th year following the death.

OK.

Practitioners and advisors presumed that the 10-year rule meant that one could skip MRDs for years 1 through 9 and then drain the account in year 10. It might not be the most tax-efficient thing to do, but one could.

The IRS has a publication (Publication 590-B) that addresses IRA distributions. In March, 2021 it included an example of the new 10-year rule. The example had the beneficiary pulling MRDs in years 1 through 9 (just like before) and emptying the account in year 10.

Whoa! exclaimed the planners and advisors. It appeared that the IRS went a different direction than they expected. There was confusion, tension and likely some anger.

The IRS realized the firestorm it had created and revised Publication 590-B in May with a new example. Here is what it said:

For example, if the owner dies in 2020, the beneficiary would have to fully distribute the plan by December 31, 2030. The beneficiary is allowed, but not required, to take distributions prior to that date.”

The IRS, planners and advisors were back in accord.

Now I am skimming the new Proposed Regulations. Looks like the IRS is changing the rules again.

The Regs require one to separate the beneficiaries as before into two classes: those exempt from the 10-year rule (the surviving spouse, disabled individuals and so forth) and those subject to the 10-year rule.

Add a new step: for the subject-to group and divide them further by whether the deceased had started taking MRDs prior to death. If the decedent had, then there is one answer. If the decedent had not, then there is a different answer.

Let’s use an example to walk through this.

Clark (age 74) and Lois (age 69) are killed in an accident. Their only child (Jon) inherits their IRA accounts.

Jon is not a disabled individual or any of the other exceptions, so he will be subject to the 10-year rule.

One parent (Clark) was old enough to have started MRDs.

The other parent (Lois) was not old enough to have started MRDs.

Jon is going to see the effect of the proposed new rules.

Since Lois had not started MRDs, Jon can wait until the 10^th year before withdrawing any money. There is no need for MRDS because Lois herself had not started MRDs.

OK.

However, Clark had started MRDs. This means that Jon must take MRDs beginning the year following Clark’s death (the same rule as before the SECURE Act). The calculation is also the same as the old stretch IRA: Jon can use his life expectancy to slow down the required distributions – well, until year 10, of course.

Jon gets two layers of rules for Clark’s IRA:

·      He has to take MRDs every year, and

·      He has to empty the account on or by the 10^th year following death

There is a part of me that gets it: there is some underlying rhyme or reason to the proposed rules.

However, arbitrarily changing rules that affect literally millions of people is not effective tax administration.

Perhaps there is something technical in the statute or Code that mandates this result. As a tax practitioner in mid-March, this is not my time to investigate the issue.  

The IRS is accepting comments on the proposed Regulations until May 25.

I suspect they will hear some.

IRS Collection Statute Expiration Date (CSED)

 I consider it odd.

I have two files in my office waiting on the collection statute of limitations to expire.

It is not a situation I often see.

Audits, penalty abatements, payment plans, offers and innocent spouse requests are more common.

Let’s talk about the running of the collection statute of limitations.

COMMENT: I do not consider this to be valid tax planning, and I am quite reluctant to represent someone who starts out by intending to do the run. That said, sometimes unfortunate things happen. We will discuss the topic in the spirit of the latter.

Let’s set up the two statutes of limitations:

(1) The first is the statute on assessment. This is the familiar 3-year rule: the IRS has 3 years to audit and the taxpayer has 3 years to amend.

COMMENT: I do not want to include the word “generally” every time, as it will get old. Please consider the modifier “generally” as unspoken but intended.

(2)  The second is the statute on collections. This period is 10 years.

We might conversationally say that the period can therefore go 13 years. That would be technically incorrect, as there would be two periods running concurrently. Let’s consider the following example:

·      You filed your individual tax return on April 15, 2020. You owed $1,000 above and beyond your withholdings and estimates.

·      The IRS audited you on September 20, 2022. You owed another $4,000.

·      You have two periods going:

o  The $1,000 ends on April 15, 2030 (2020 + 10 years).

o  The $4,000 ends on September 20, 2032 (2022 + 10 years).

Alright, so we have 10 years. The expiration of this period is referred to as the “Collection Statute Expiration Date” or “CSED”.

When does it start?

Generally (sorry) when you file the return. Say you extend and file the return on August 15. Does the period start on August 15?

No.

The period starts when the IRS records the return.

Huh?

It is possible that it might be the same date. It is more possible that it will be a few days after you filed. A key point is that the IRS date trumps your date.

How would you find this out?

Request a transcript from the IRS. Look for the following code and date:

                  Code          Explanation

                    150           Tax return filed

Start your 10 years.

BTW if you file your return before April 15, the period starts on April 15, not the date you filed. This is a special rule.

Can the 10 years be interrupted or extended?

Oh yes. Welcome to tax procedure.

The fancy 50-cent word is “toll,” as in “tolling” the statute. The 10-year period is suspended while certain things are going on. What is going on is that you are probably interacting with the IRS.

OBSERVATION: So, if you file your return and never interact with the IRS – I said interact, not ignore – the statute will (generally – remember!) run its 10 years.

How can you toll the statute?

Here are some common ways:

(1)  Ask for an installment payment plan

Do this and the statute is tolled while the IRS is considering your request.

(2)  Get turned down for an installment payment plan

                  Add 30 days to (1) (plus Appeals, if you go there).

(3)  Blow (that is, prematurely end) an installment payment plan

Add another 30 days to (1) (plus Appeals, if you go there).

(4)  Submit an offer in compromise

The statute is tolled while the IRS is considering your request, plus 30 days.

(5)  Military service in a combat zone

The statute is tolled while in the combat zone, plus 180 days.

(6)  File for bankruptcy

The statute is tolled from the date the petition is filed until the date of discharge, plus 6 months.

(7)  Request innocent spouse status

The statute is tolled from the date the petition is filed until the expiration of the 90-day letter to petition the Tax Court. If one does petition the Court, then the toll continues until the final Court decision, plus 60 days.

(8)  Request a Collections Due Process hearing

The statute is tolled from the date the petition is filed until the hearing date.

(9)  Request assistance from the Taxpayer Advocate

The statute is tolled while the case is being worked by the Taxpayer Advocate’s office.

Unfortunately, I have been leaning on CDP hearings quite a bit in recent years, meaning that I am also extending my client’s CSED. I have one in my office as I write this, for example. I have lost hope that standard IRS procedure will resolve the matter, not to mention that IRS systems are operating sub-optimally during COVID. I am waiting for the procedural trigger (the “Final Notice. Notice of Intent to Levy and Notice of Your Rights to a Hearing”) allowing the appeal. I am not concerned about the CSED for this client, so the toll is insignificant.

There are advanced rules, of course. An example would be overlapping tolling periods. We are not going there in this post.

Let’s take an example of a toll.

You file your return on April 15, 2015. You request a payment plan on September 5, 2015. The IRS grants it on October 10, 2015. Somethings goes wobbly and the IRS terminates the plan. You request a Collection Due Process hearing on June 18, 2019. The hearing is resolved on November 25, 2019.

Let’s assume the IRS posting date is April 15, 2015.

Ten years is April 15, 2025.

It took 36 days to approve the payment plan.

The plan termination automatically adds 30 days.

The CDP took 161 days.

What do you have?

April 15, 2025 … plus 36 days is May 21, 2025.

Plus 30 days is June 20, 2025.

Plus 161 days is November 28, 2025.

BTW there are situations where one might extend the CSED separate and apart from the toll. Again, we are not going there in this post.

Advice from a practitioner: do not cut this razor sharp, especially if there are a lot of procedural transactions on the transcript. Some tax practitioners will routinely add 4 or 5 weeks to their calculation, for example. I add 30 days simply for requesting an installment payment plan, even though the toll is not required by the Internal Revenue Manual.  I have seen the IRS swoop-in when there are 6 months or so of CSED remaining, but not when there are 30 days.

Use Certified Mail With The IRS

I am looking at Baldwin v U.S., at least as much as I can between the September and October 15^th due dates.

In the blog equivalence of cinematic foreboding, the case comes out of the Ninth Circuit.

The Baldwins filed a 2007 joint tax return showing an approximate $2.5 million loss from a movie production business.

They filed to carry the loss back to 2005 for a refund.

They had three years to file the refund claim. The three years started with the filing of their 2007 return – that is, the year that showed the loss. They filed their 2007 return on extension, so three years later would be October 15, 2011.

They filed the refund claim on June 21, 2011.

Seems plenty of time.

They filed using regular mail.

The IRS said they never received the refund claim.

Problem.

The three years expired. Sorry about your luck, Baldwins, purred the IRS.

You know this went to court.

It went to a California district court.

And we get to talk about the mailbox rule.

There is a provision in the tax Code that timely-mailing-equals-timely filing with the IRS. That is the reason you hear (not as much now in the era of electronic filing) of people heading to the post office on April 15^th. Folks want to get that “April 15” stamped on the envelope, as that stamp means the return is considered timely filed with the IRS.

By the way, that provision did not enter the Code until 1954.

What did folks do before 1954?

They relied on common law.

Common law allows one to presume that a properly-mailed envelope will arrive in the ordinary time required to get from here to there. One would have to prove that one mailed the envelope, of course, but once that was done the presumption that the mail arrived in normal time would kick-in.

In 1954 Congress added the following:

§ 7502 Timely mailing treated as timely filing and paying.

(a)  General rule.

(1)  Date of delivery.

If any return, claim, statement, or other document required to be filed, or any payment required to be made, within a prescribed period or on or before a prescribed date under authority of any provision of the internal revenue laws is, after such period or such date, delivered by United States mail to the agency, officer, or office with which such return, claim, statement, or other document is required to be filed, or to which such payment is required to be made, the date of the United States postmark stamped on the cover in which such return, claim, statement, or other document, or payment, is mailed shall be deemed to be the date of delivery or the date of payment, as the case may be.

Section (c) is important here:

(c)  Registered and certified mailing; electronic filing.

(1)  Registered mail.

For purposes of this section , if any return, claim, statement, or other document, or payment, is sent by United States registered mail-

(A)  such registration shall be prima facie evidence that the return, claim, statement, or other document was delivered to the agency, officer, or office to which addressed; and

(B)  the date of registration shall be deemed the postmark date.

Section (c) is why accountants encourage the use of certified mail with tax returns.

But the Baldwins did not certify their mailing.

They instead argued that they met the common-law standard for timely filing.

Seems a solid argument.

The IRS went low.

There are Court cases out there (Anderson, for example) that decided that the common law standard continued to exist even after the codification of Section 7502. It makes sense – at least to me - as that is what common law means.

The IRS argued that Section 7502 did away with the common-law standard, and the cases deciding otherwise were decided erroneously.

Sounds like a truckload of fine-cut bull manure to me.

Let’s load the truck.

There was a case in 1984 called Chevron. From it came the Chevron doctrine, an administrative law principle that a government agency’s interpretation of an ambiguous or unclear statute should be respected by a court.

I get the concept.

The first thing the agency has to do is show that the statute is ambiguous or unclear.

Does Section 7502 appear ambiguous or unclear to you?

We are going to need a jump to get this truck going.

Let’s introduce National Cable & Telecommunications Association v Brand X. That case has to do with the internet and whether it is an information service or a telecommunication service.

Sounds boring.

Let’s look at the Ninth Circuit’s take-away from Brand X:

But [a] court’s prior judicial construction of a statute trumps an agency construction otherwise entitled to Chevron deference only if the prior court decision holds that its construction follows from the unambiguous terms of the statute and thus leaves no room for agency discretion.”

Let me translate that word salad:

Since the prior Court decisions (let’s use Anderson as an example) did not specifically say that the statute was unambiguous, the statute is therefore ambiguous.

Huh?

So, if I do not make clear that I am not a Robert Howard sword-and-sorcery, skilled, powerful and fearless giant weapon-wielding barbarian, then it can be deduced that I am that very said barbarian?

Cool!

Brand X lets me say that Section 7502 is ambiguous, at which point Chevron kicks-in and allows me to argue that the underlying statute means anything I want it to say.

There is an aisle for this at Borders. It is called “Fiction.”

The Baldwins did not get to rely on common-law. Since they could not meet requirements of Section 7502(c), they lost out altogether. No carryback refund for them.

IRS Extends Key Deadline for 2010 Estates

On September 13, 2011 the IRS announced that estates of 2010 decedents will have until next year to file certain tax forms and pay the related taxes. In addition, the IRS is also providing relief for beneficiaries of those estates.

The timing was critical, as 2010 estate tax returns for decedents dying on or before 12/16/2010 were due Monday, September 19, 2011. Estate tax returns are normally due nine months after death, but there was an exception because of last year’s tax law flux.

Remember there was no estate tax for most of 2010. On December 17, 2010, the President signed a tax bill that reinstated the estate tax retroactively to January 1, 2010. That law set a 35% estate tax rate and provided an estate tax exemption of $5 million. The advantage to this scheme is that estate assets get “stepped-up” to their fair market value at the date of death. This means that the inheritors can (generally) sell the assets right away without incurring any income tax. To complicate matters, the bill also made this scheme an option for 2010. Estates of 2010 decedents could opt out of the new tax and use a modified basis carryover regime. There would be no estate tax, but the heirs received the same basis in assets as the decedent (with a $3 million exception for the surviving spouse and a $1.3 million exception for non-spousal beneficiaries). This opt-out required the beneficiaries to know the carryover basis in the assets inherited, so the IRS created a new form (Form 8939 - Allocation of Increase in Basis for Property Acquired From a Decedent). Opting-out of the estate tax is an irrevocable election.

As I write this, the IRS has not finalized Form 8939, although a draft version is available.

The IRS is providing the following filing relief:

·    If the estate is opting out of the new estate tax regime (that is, an estate of $5 million or more) it will have until January 17, 2012, to file Form 8939. This form was previously due November 15, 2011. The new due date will apply automatically; the estate does not need to file any anything.

·    Estates between 1/1/2010 and 12/16/2010 that request an extension to file their estate tax returns and pay any estate tax due will have until March 19, 2012, to file. The IRS will not assess penalties for either late filing or late payment.  Interest will be due on any estate tax paid after the original due date.

·    Estates between 12/17/10 and 12/31/10 will be due 15 months after the date of death. The IRS will not assess penalties for either late filing or late payment.  Interest will be due on any estate tax paid after the original due date.

·    The IRS is providing penalty relief to beneficiaries who received property from a 2010 decedent and also sold the property in 2010. The taxpayer should write “IRS Notice 2011-76” on the amended return to identify the issue to the IRS.

Confused? It is easy to be.  Some thoughts:

(1)   Seems to me that an estate under $5 million would generally elect-out, especially if the appreciation in estate assets is less than $1.3 million. In that event, we don’t even need the spousal $3 million to protect all the step-up.

a.   Remember that there are assets that do not receive a step-up. These are sometimes referred to as IRD (income in respect of a decedent) assets. The most common – by far – are 401(k) s and IRAs.

(2)   Estates over $5 million are a tougher call.

a.   Even then, it depends on the mix of assets. If the majority of assets are IRD assets, the step-up may be modest, as IRD assets do not step-up. That would incline one to the carryover regime.

b.   We are now balancing the estate tax with looming income taxes when the beneficiaries sell the assets.  If there is modest appreciation, then the carryover regime would appeal. If there is substantial appreciation, then the new tax regime would appeal – maybe.

                                          i.    Why maybe? Because it depends on the tax rate. If the assets would generate capital gains, an Ohio beneficiary would face an approximate 21% income tax rate (15% federal plus 6% Ohio). Why would one pay 35% when one could pay 21%?

c.   Frankly, I am not sure how one could determine the best course of action without assembling the fair market values and basis for all estate assets and considering the intentions of the beneficiaries. If the beneficiary intends to sell the asset right away, then one could incline to a different decision than if the beneficiary intends to retain the asset forever.

d.   There is an issue in the carryover regime that concerns tax practitioners. How do you determine the basis of an asset that has been owned forever and for which cost records do not exist? This is not a small matter, as the default IRS response is to say that the asset has a basis of zero. If this fact pattern is a significant for the estate, then one would be inclined to the new tax regime as the assets would step-up to fair market value on the date of death.