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Taxpayer withdrew substantial amount of funds from IRA in…

Taxpayer withdrew substantial amount of...
Taxpayer withdrew substantial amount of funds from IRA in 2017. This was above the RMD. The payer only w/h taxes on the RMD distribution and not the extra distribution that was withdrawn. Now, he is looking at a large tax balance due. The extra money was taken to pay off a mortgage. Is there any option available to him to lessen this tax bill? 10 year averaging? He and his wife are both 74.
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Customer reply replied 1 month ago
This was not a total distribution.
Answered in 32 minutes by:
3/10/2018
Dr. Fiona Chen
Dr. Fiona Chen, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 940
Experience: Former IRS Revenue Agent
Verified

I'm Fiona, former IRS revenue agent. I am looking at your question and will get back to you soon. Fiona Chen, MPA, Ph.D., CPA, ABV, CFF, CITP,IMTA

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Dear Customer,

What we cannot get in the front door, we may be able to get in the back door.

There is no tax rules and regulations for us to recommend to the taxpayers not to pay tax on current year taxable income.

However, if they wanted to payoff mortgage just to relieve from living expenses burden and pressure, there are two possibilities which may also allow them to reduce the burden to a certain degree. The first one is more obvious than the second one.

Part I.

One, report and submit tax return as it is. Then, at the same time, apply with the IRS for an installment payment plan and set it up as a direct debit arrangement. They may even open up an account just to deal with the payment. They, then, will have up to six years, 72 months to pay the installment payment plan, if they owe less than 50,000.

"Taxpayers who owe up to $50,000 in back taxes will now be able to enter into a streamlined agreement with the IRS that stretches the payment out over a series of months or years. The maximum term for streamlined installment agreements has also been raised to 72 months from the current 60-month maximum."

https://www.irs.gov/newsroom/irs-offers-new-penalty-relief-and-expanded-installment-agreements-to-taxpayers-under-expanded-fresh-start-initiative

If they want even lower than the 6-year monthly amount, they need to apply and disclose all their financial information.

Part II.

They love their house that much to fully payoff. They possibly are interested in staying in this house forever. Then, this is a possible place for them to consider reverse mortgage. Their financial pressure will reduce by having a monthly income to come in to help them enjoy the place and pay the IRS debt.

Please feel free to follow up.

Regards,

Fiona

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Customer reply replied 1 month ago
The first option appears the best for their situation. The link above showed the info is outdated. Has this option changed due to the TCJA for 2018 and forward? I know they will pay interest, but will penalties still be in place as well?

Dear Customer,

Yes. There is a late payment penalty but it is not very high in percentage.

Here is an updated website. Steam line installment payment plan is always valid. The enclosed website is dated October 2017. The IRS is testing to expand to up to 100,000 balance.

https://www.irs.gov/businesses/small-businesses-self-employed/streamlined-processing-of-installment-agreements

Both alternatives are not mutually exclusive. Your clients should consider both. Otherwise, the financial pressure they were trying to avoid is now moves and changed to paying the IRS.

Regards,

Fiona

Dr. Fiona Chen
Dr. Fiona Chen, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 940
Experience: Former IRS Revenue Agent
Verified
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Dr. Fiona Chen
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Category: Tax
Satisfied Customers: 940
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Experience: Former IRS Revenue Agent

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