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Something doesn't add up with your numbers. If the missed RMD was $5,695, the maximum excise tax penalty should be 50% of that, which is $2,847.50. But the IRS is asking for the full $5,695 plus penalties? Did you include the distribution on his tax return for 2022 (even though it was taken in 2023)? If not, the IRS might be considering this unreported income, which would explain why they're including the full amount as a tax increase. Also, I think you misunderstood what Form 5329 does. Lines 53-55 being zero means you calculated no penalty due (requesting a waiver). But you still have to report and pay tax on the RMD amount itself once it's distributed.
Hmm, I don't think we included it on his 2022 return since he actually took the distribution in April 2023. Should we have reported it for 2022 anyway since that's when it should have been taken? And if so, would we need to file an amended return for 2022? So if I'm understanding correctly: 1. We need to pay income tax on the RMD regardless (either in 2022 or 2023) 2. There's potentially a 50% excise tax penalty, which we requested a waiver for 3. Since we didn't include it on the 2022 return, they're adding failure to file/pay penalties Is that right?
Yes, you've got it exactly right. The RMD should have been reported in 2022 even though you took it in 2023, since that's the year it was required. So you would need to file an amended return for 2022 showing this income. The IRS is essentially doing this correction for you automatically, which is why they're adding the tax on the RMD amount plus the failure to file/pay penalties. This is separate from the 50% excise tax penalty (which your Form 5329 requested a waiver for). I'd recommend responding to their notice explaining that you already filed Form 5329 requesting a waiver of the excise tax penalty since you corrected the error as soon as you discovered it. You might still owe the regular income tax plus some penalties for late filing/payment, but you can often get those reduced if you show good faith in correcting the issue.
Just to add another perspective - my father missed his RMD two years ago, and we went through this same process. We had to: 1. Take the missed distribution immediately 2. File Form 5329 requesting a waiver of the 50% penalty 3. Include a letter explaining WHY it was missed (in our case, health issues) 4. File an amended return to include the missed RMD as income in the correct year The IRS initially sent a similar notice to what you received, but after we responded with a detailed explanation, they waived most of the penalties. We still had to pay the basic income tax on the distribution amount plus some interest, but they removed the failure to file/pay penalties. The key was providing a legitimate reason why it was missed and showing we corrected it immediately upon discovery.
How long did it take for the IRS to respond after you sent in all that documentation? I'm in a similar situation and getting anxious about how long the process might drag on.
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Don't overlook state-specific requirements! I'm in California, and the $800 annual franchise tax for LLCs was a huge shock when I formed mine. The DBA route has no annual fee besides the initial registration and renewal every 5 years. Some states are much cheaper for LLCs, while others have similar fees to CA. Research your specific state's requirements before deciding.
Do you think the liability protection is worth that extra $800 per year? I'm also in CA and trying to decide if I should make the jump from my photography DBA to an LLC.
It really depends on your specific situation and risk exposure. For my consulting business where I could potentially face lawsuits if clients lose money based on my advice, I feel the $800 is worth it for the peace of mind. For a photography business, you might consider the types of shoots you do (weddings carry more liability than portraits), the value of your contracts, and whether you ever have employees or assistants who could create additional liability. Also factor in your personal assets that would be at risk - if you own a home or have significant savings, the protection becomes more valuable.
Has anyone actually formed an LLC themselves without using a service? I've been operating with a DBA for my handmade jewelry business but want more protection. LegalZoom wants like $300+ but the actual state filing fee is only $50 in my state.
Yep, did it myself in NC. Super easy. Just downloaded the Articles of Organization form from the Secretary of State website, filled it out (it's basically just your business name, address, and registered agent info), paid the filing fee online, and received confirmation in about a week. Also wrote my own operating agreement using a template I found online. Saved hundreds compared to using a service. Just make sure you research your state's specific requirements.
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Just to add some additional context about Cafe 125 plans - these are established under Section 125 of the Internal Revenue Code (hence the name) and allow employees to pay for certain benefits with pre-tax dollars. This typically includes health insurance premiums, dental insurance, vision care, and sometimes FSA or HSA contributions. The key issue in your brother-in-law's case is that whatever amount was actually deducted pre-tax should match what's reported on the W-2. If the employer took double payments but only reported half on the W-2, they've essentially taxed him on money he never received.
So what happens if they never fix it and tax season ends? Can you still file with the wrong W-2 and fix it later?
You can file your tax return with the information you have and later amend it when you receive a corrected W-2. However, I recommend trying to get the corrected W-2 before filing if possible. If you must file before receiving the correction, you should consider filing Form 4852 (Substitute for Form W-2) along with your tax return. This form allows you to provide what you believe are the correct numbers based on your paystubs and other documentation. Be sure to explain the situation in the form and keep copies of all your evidence showing the correct withholding amounts.
Has your brother-in-law checked his last December paystub against his W-2? Sometimes the year-end paystub will show the total pre-tax deductions for the entire year. He could compare this with what's shown in the Cafe 125 box on the W-2 to confirm the discrepancy.
This is the best advice here. My company messed up my W-2 last year, but I was able to show them my December paystub with YTD totals that proved their numbers were way off. Print everything out and highlight the numbers!
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Another option is to use the IRS Withholding Estimator directly: https://www.irs.gov/individuals/tax-withholding-estimator Just make sure you have your most recent paystubs handy to enter accurate year-to-date information. And remember that as a dependent student, your standard deduction might be limited compared to someone who can't be claimed as a dependent.
I tried using the IRS estimator but kept getting errors every time I entered my capital gains info. Has anyone else had this problem?
The IRS estimator can definitely be finicky with capital gains. Make sure you're entering them as "other income" rather than earned income. Also, try using a different browser if you're getting technical errors - sometimes it works better in Chrome than Firefox or vice versa. If you're still having trouble, you might want to try a different calculator or just focus on your W2 income for the W4 calculations. Since your LTCG are in the 0% bracket anyway, they won't affect your withholding needs as much.
Does anyone know if you can just use the W4 estimator and then add a flat additional amount on line 4(c)? Like if I know I need to have $500 more withheld total before the end of the year, and I have 10 paychecks left, can I just put $50 per check?
Yes that's exactly what line 4(c) is for! I did this last year. Just divide the total additional amount you need withheld by your remaining paychecks and put that number on line 4(c). Super easy way to fine-tune your withholding.
Perfect, that's exactly what I needed to know. Thanks for confirming! I'm going to do the math and adjust my withholding tomorrow.
Margot Quinn
Don't forget that Section 965(a) inclusion applies differently depending on whether your client is a U.S. shareholder of a deferred foreign income corporation (DFIC) or an E&P deficit foreign corporation. The inclusion amount would be the greater E&P as of November 2, 2017, or December 31, 2017. If you're missing historical data, focus on reconstructing those specific dates.
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Liv Park
•Thanks for this! The corporation is definitely a DFIC in our case. The problem I'm having is that the client acquired the SFC in 2016, so we do have that year's info, but I wasn't sure if we needed to somehow account for pre-acquisition E&P for the Section 965 calculation or if we could just start with the E&P as of the acquisition date.
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Margot Quinn
•You should use the acquisition date as your starting point. The Section 965 inclusion applies to the shareholder's pro rata share of accumulated post-1986 E&P, but only for the period during which the foreign corporation was an SFC with respect to your specific U.S. shareholder. Pre-acquisition E&P wouldn't be included because your client didn't have a pro rata share of that E&P (they weren't a U.S. shareholder of the SFC during that time). Start with the E&P as of acquisition and then track forward to the measurement dates.
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Evelyn Kim
Has anyone run into the issue of foreign tax credits with acquired SFCs under Section 965? I'm trying to figure out if my client can claim FTCs for foreign taxes paid by the SFC before they acquired it.
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Diego Fisher
•Generally, no. FTCs related to Section 965 inclusions should only be available for the taxes paid during the period your client was a US shareholder. The same principle applies - if they weren't a shareholder when the taxes were paid, they can't claim the credits associated with that pre-acquisition period.
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