For those who have inherited wealth, it’s well known that tax payments can be a major headache. The IRS is offering new relief on some penalties, including penalties on international returns for 2019 and 2020 tax years. Heirs in the United States will not only inherit benefits but also tax problems related to bureaucratic issues. Starting in 2025, the IRS will begin enforcing a long-debated rule requiring certain beneficiaries of inherited IRAs, other than spouses, to make mandatory minimum withdrawals (MMDs), according to official sources.
“That’s a significant blow for someone who may not even realize they’ve made a mistake”
The saying “ignorance of the law is no excuse” applies here. “If you don’t make the mandatory withdrawal, you face a penalty of up to 25% of the amount you should have withdrawn,” said Denise Appleby, CEO of Appleby Retirement Consulting, adding, “That’s a significant blow for someone who may not even realize they’ve made a mistake.” Under the law, many of these IIR penalties apply even when there is no underlying tax liability, so having all the facts and information clear is crucial.
The application of annual redundancy checks is new and carries serious financial consequences for non-compliance
The legal framework is very broad, and taxpayers face a complex set of reporting requirements and associated penalties that cover, among other things, certain foreign financial assets, certain interests in foreign business entities, and gifts or inheritances from foreign sources. While the 10-year rule, in effect since 2020, requires the full withdrawal of funds within ten years, the application of annual redundancy checks is new and carries serious financial consequences for non-compliance. Therefore, a lack of information can have significant economic repercussions.
Under the SECURE Act, including adult children, who inherit an IRA must liquidate it within 10 years of the original owner’s death
To provide some context, about a decade ago, the IRS changed its policy on IIR penalties and began automatically applying penalties when taxpayers voluntarily filed late returns. Under the SECURE Act, most non-spouse heirs, including adult children, who inherit an IRA must liquidate it within 10 years of the original owner’s death. But the IRS didn’t ask questions about why; it simply imposed life-altering penalties.
After the IRS automatically applied large penalties to these taxpayers, it began collection efforts against them
The IRS had suspended enforcement of this rule for several years while it clarified the regulations, so it was unclear whether these beneficiaries were required to make annual minimum mandatory withdrawals (MMDs) during that period. Then, after the IRS automatically applied large penalties to these taxpayers, it began collection efforts against them. According to some research, contrary to what most people assumed, these penalties were applied to low-income taxpayers, small businesses, and immigrants.
If the error is detected early, the IRS offers the possibility of reducing the penalty from 25% to 10%
There are numerous examples of taxpayers who received a one-time, tax-free gift or inheritance and were unaware of their filing obligation. Upon learning of the filing requirement, these taxpayers filed late and were penalized. Now, starting in 2025, the IRS has clarified that if the original IRA owner had already reached the minimum mandatory retirement age at the time of their death, the beneficiary must make annual withdrawals for 10 years. If the error is detected early, the IRS offers the possibility of reducing the penalty from 25% to 10%, provided the correct withdrawal is made within the following two years and Form 5329 is filed with a reasonable explanation. In any case, what is clear is that failure to comply with this obligation will result in significant penalties, so if you receive an inheritance, it is best to be aware of all the necessary steps.
