Take-Away: New, favorable, rules apply when an excess contribution is made to an IRA, or there is a failure to take a required minimum distribution (RMD).

Background: Under prior law, the statute of limitations for excise taxes imposed on excess contributions to an IRA, or the failure to take a timely required minimum distribution (RMD) started to run as of the date that a specific excise tax return, Form 5329, is filed by the individual reporting the violation. Often an individual IRA owner is not aware of the requirement to file Form 5329. Consequently, the failure to file Form 5329 led to an indefinite period of limitations that caused hardship for the IRA owner due to the accumulation of interest and penalties over an extended period of time. This was the result in Paschall v. Commissioner, 127 Tax Court 8 (2011).

SECURE Act 2.0, Section 313: The Secure Act 2.0 change provides some finality for an IRA owner. It creates a 3-year period of limitations for the period where there is a failure to take an RMD when the individual IRA owner files an income tax return (Form 1040) for the year of the violation. It creates an exception to the 3-year limitations period, in turn creating a 6-year limitations period for excess contributions to the IRA from the date Form 1040 was filed. It also creates an exception to the 6-year limitations period in the rare situation where there are taxes that arise out of a bargain-sale to an IRA.

SECURE Act 2.0, Section 302: The Act reduces the excise tax for the failure to take an RMD from 50% to 25%. In addition, if that failure to take an RMD from an IRA is corrected in a timely manner, basically by the due date of the owner’s federal income tax return, as extended (Form 1040), then the excise tax is further reduced from 25% to 10%.

Effective Date: Both of these changes are effective in 2023.