IRS to Waive Some Penalties for Retirees

The Internal Revenue Service announced Wednesday that it will waive penalties for underpayments of estimated tax on most types of retirement income for 1987.

The agency earlier had decided not to impose such penalties on wages earned in 1987 because of widespread confusion about the new tax law and a complex W-4 withholding form.

In another decision affecting retirees, the IRS said owners of multiple individual retirement accounts who passed age 70 1/2 in 1987 will be allowed more discretion in choosing from which account to take a distribution. Such owners are required to take money from an IRA by April 1.

A change in the law required those with multiple IRA accounts to divide the minimum required distribution among those accounts.

Under the change announced Wednesday, an IRA owner older than 70 1/2 still will have to calculate a required distribution from each account but may then choose to take the entire payout from any one or more accounts.

Benefits Cited

The IRS announcement said taxpayers who already have received payouts from their IRAs and want to take advantage of the new rule may be able to return the distribution to one or more accounts under existing “rollover” provisions. In general, an IRA owner has a 60-day period each year during which an account may be rolled over into another.

This change could benefit, for example, a retiree who has some high-earning IRAs and some that are earning less. The retiree might find it beneficial to take the required minimum distribution from the less lucrative IRA and keep the high earning one intact.

The IRS, in announcing that no underpayment penalties will be imposed on most retirement income, said most affected taxpayers will have to do nothing to take advantage of the waiver. Those who have already filed a return and paid the estimated-tax penalty will have any overpayment refunded.

A taxpayer who receives a penalty notice dated before May 2 and has not responded should called the IRS toll-free line for assistance, the agency said. That number is (800) 424-1040.

The waiver applies to any retirement income that must be reported on Line 16b of Form 1040.