Have you been accumulating a treasure trove in your qualified retirement plans and IRAs without any current tax erosion? If you take distributions from these accounts before your retirement, you must pay the tax piper. And the IRS eventually requires you take out some of the money—whether you want to or not.
Even worse, you can’t pretend that you don’t know the rules. As shown in a new case, Pal, TC Memo 2026- 93, 10/7/26, failing to report the taxable income on your return can result in a tax disaster.
Background …
Distributions from qualified retirement plans and IRAs are taxed at ordinary income rates now topping out at 37%. Also, you must pay a 10% penalty tax on any distributions made prior to age 59½, unless a special tax law exception applies. For example, withdrawals made on account of a disability are exempt from the 10% penalty.
The 10% is applied on top of the regular income tax you owe.
Furthermore, you must begin taking “required minimum distributions” (RMDs) from qualified plans and traditional IRAs after you reach age 73 (scheduled to increase to age 75 in 2033). Then you must continue taking RMDs year-in and year-out. If you do not comply with these rules, the IRS may impose a penalty equal to 25% of the amount that should have been withdrawn (recently reduced from 50% of the shortfall) or 10% if the mistake is quickly corrected.
If you take distributions but fail to report them on your return, the IRS computers may discover the oversight by matching the information reported by the custodian on Form 1099-R. This could easily cost you tens of thousands of tax dollars.
Facts of the new case …
The taxpayer, an aerospace engineer, received about $230,000 from his IRA with an E*Trade account. The Form 1099-R that was sent from the broker indicated that he made an early withdrawal of those IRA funds. But the taxpayer claimed that he never received the form nor was he aware of tax reporting requirements for the distribution. The IRS assessed a deficiency and the taxpayer proceeded to Tax Cour.
Upon examination, the Court found that there was no compelling reason why the taxpayer should not be held liable for the IRA distribution. In addition, the taxpayer did not produce any evidence that he qualified for a statutory exception to the 10% early withdrawal penalty. Ultimately, he was responsible for the back taxes, penalties and interest totaling more than $80,000.
Moral of the story …
The IRS doesn’t take kindly to arguments that IRA and qualified plan recipients are not aware of their responsibilities or that their custodian or broker failed to properly report their distributions. When push comes to shove, the courts will likely side with the IRS on this issue. Stay on top of your obligations as the year draws to a close.
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